The rate of return on the common stock of Flowers by Flo is expected to be 15 percent in a boom economy,7 percent in a normal economy,and only 3 percent in a recessionary economy.The probabilities of these economic states are 20 percent for a boom,70 percent for a normal economy,and 10 percent for a recession.What is the variance of the returns on this stock?
A).001296
B).001580
C).001963
D).002001
E).002471

Question

Quizplus · Accepted Answer

E(r)= (.20 × .15)+ (.70 × .07)+ (.10 × .03)= .082Var = .20 × (.15 - .082)² + .70 × (.07 - .082)² + .10 × (.03 - .082)² = .001296

The Rate of Return on the Common Stock of Flowers