The rate of return on the common stock of Lancaster Woolens is expected to be 21 percent in a boom economy,11 percent in a normal economy,and only 3 percent in a recessionary economy.The probabilities of these economic states are 10 percent for a boom,70 percent for a normal economy,and 20 percent for a recession.What is the variance of the returns on this common stock?
A)0.002150
B)0.002606
C)0.002244
D)0.002359
E)0.002421

Question

Quizplus · Accepted Answer

E(r) = (0.10 × 0.21) + (0.70 × 0.11) + (0.20 × 0.03) = 0.104Var = 0.10 (0.21 - 0.104)² + 0.70 (0.11 - 0.104)² + 0.20 (0.03 - 0.104)² = 0.002244

The Rate of Return on the Common Stock of Lancaster