If the economy booms,RTF,Inc. stock is expected to return 10%. If the economy goes into a recessionary period,then RTF is expected to only return 4%. The probability of a boom is 60% while the probability of a recession is 40%. What is the variance of the returns on RTF,Inc. stock?
A) .000200
B) .000760
C) .000864
D) .001594
E) .029394

Question

Quizplus · Accepted Answer

To calculate the variance of the returns, we need to use the formula:
variance = (probability of boom x return during boom - expected return)^2 + (probability of recession x return during recession - expected return)^2

variance = (0.6 x 0.1 - 0.04)^2 + (0.4 x 0.04 - 0.04)^2
variance = (0.056)^2 + (0)^2
variance = 0.000864

Therefore, the variance of the returns on RTF, Inc. stock is 0.000864 or approximately 0.0009, which is option C.

If the Economy Booms,RTF,Inc