123k views
1 vote
A stock can earn a return of 2%, 20%, or 8%. The stock’s distribution is known, and states that there is a 30% probability of the stock earning a return of 2%, a 36% probability of the stock earning a return of 20%, and a 34% probability of stock earning a return of 8%. What is the variance of the stock’s return?Select one: a. .0056 b. .0923 c. .0061 d. .078 e. .0748

1 Answer

0 votes

Answer:

option (a) 0.0056

Step-by-step explanation:

Data provided in the question:

Return that can be earned : 2% 20% 8%

Probability of returns : 30% 36% 34%

Now,

Average return, m =
(2\% + 20\% + 8\%)/(3) = 10%

Return (X) P(X) X - m ( X - m )² ( X - m )² × P(X)

2% 30% -8% = -0.08 0.0064 0.00192

20% 36% 10% = -0.10 0.01 0.0036

8% 34% -2% = -0.02 0.0004 0.000136

Thus,

Variance of the stock’s return = ∑ ( ( X - m )² × P(X) )

= 0.00192 + 0.0036 + 0.000136

= 0.005656 ≈ 0.0056

Hence,

The correct answer is option (a) 0.0056

User Dan McGrath
by
8.0k points

No related questions found

Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.