The rate of return on the common stock of a company is expected to be 11.25% in a boom economy, 6.25% in a normal economy, and only 0.75% in a recessionary economy. The probabilities of these economic states are 21.0% for a boom, 68.0% for a normal economy, and 11.0% for a recession. What is the variance of the returns on the common stock of the company?
Question 4 options:
0.000754 

0.000775 

0.000796 

0.000817 

0.000838 
Expected return=Respective return*Respective probability
=(0.21*11.25)+(0.68*6.25)+(0.11*0.75)=6.695%
probability  Return  probability*(ReturnExpected Return)^2 
0.21  11.25  0.21*(11.256.695)^2=4.35708525 
0.68  6.25  0.68*(6.256.695)^2=0.134657 
0.11  0.75  0.11*(0.756.695)^2=3.88773275 
Total=8.379475% 
Standard deviation=[Total probability*(ReturnExpected Return)^2/Total probability]^(1/2)
=(8.379475)^(1/2)
=2.89%(Approx)
Variance=Standard deviation^2
=0.000838(Approx)
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