The rate of return on the common stock of Flowers by Flo is expected to be 14% in a boom economy, 8% in a normal economy, and only 2% in a recessionary economy. The probabilities of
These economic states are 20% for a boom, 70% for a normal economy, and 10% for a recession.
What is the variance of the returns on the common stock of Flowers by Flo?
A) .001044
B) .001280
C) .001863
D) .002001
E) .002471

Question

Quizplus · Accepted Answer

To calculate the variance, first find the expected return: (0.20 * 14%) + (0.70 * 8%) + (0.10 * 2%) = 8.4%. Then, calculate the variance: 0.20*(14%-8.4%)^2 + 0.70*(8%-8.4%)^2 + 0.10*(2%-8.4%)^2 = 0.001044.

The Rate of Return on the Common Stock of Flowers