The rate of return on the shares 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 shares of Flowers by Flo?
A).001044
B).001280
C).001863
D).002001
E).002471

Question

Quizplus · Accepted Answer

The variance is calculated by finding the expected return and then using it to find the expected squared deviation from the mean. The expected return is 0.2*14% + 0.7*8% + 0.1*2% = 8.6%. The variance is 0.2*(14%-8.6%)^2 + 0.7*(8%-8.6%)^2 + 0.1*(2%-8.6%)^2 = 0.001044.

The Rate of Return on the Shares of Flowers by Flo