If the economy booms, RTF, Inc. stock is expected to return 13 percent. If the e

Question

If the economy booms, RTF, Inc. stock is expected to return 13 percent. If the economy goes into a recessionary period, then RTF is expected to only return 3 percent. The probability of a boom is 81 percent while the probability of a recession is 19 percent. What is the variance of the returns on RTF, Inc. stock?

.055500

.001539

.039230

.000954

.001247

If the economy booms, RTF, Inc. stock is expected to return 13 percent. If the economy goes into a recessionary period, then RTF is expected to only return 3 percent. The probability of a boom is 81 percent while the probability of a recession is 19 percent. What is the variance of the returns on RTF, Inc. stock?

Explanation / Answer

Expected Return = 81%*13 + 19%*3

Expected Return = 11.10%

Variance = (13%-11.10%)^2* 81% + (3%-11.10%)^2*19%

Variance = 0.001539

Answer

B) 0.001539

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