The rate of return on the common stock of a company is expected to be 14.25% in a boom economy, 9.25% in a normal economy, and only 3.75% in a recessionary economy. The probabilities of these economic states are 33.0% for a boom, 44.0% for a normal economy, and 23.0% for a recession. What is the variance of the returns on the common stock of the company?
Question 11 options:
0.001393 

0.001431 

0.001468 

0.001506 

0.001544 
Expected return=Respective return*Respective probability
=(0.33*14.25)+(0.44*9.25)+(0.23*3.75)=9.635%
probability  Return  probability*(ReturnExpected Return)^2 
0.33  14.25  0.33*(14.259.635)^2=7.02841425 
0.44  9.25  0.44*(9.259.635)^2=0.065219 
0.23  3.75  0.23*(3.759.635)^2=7.96564175 
Total=15.059275% 
Standard deviation=[Total probability*(ReturnExpected Return)^2/Total probability]^(1/2)
=(15.059275)^(1/2)
=3.88%(Approx)
Variance=Standard deviation^2
=0.001506(Approx)
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