Question

A stock will have a loss of 11.5% in a bad economy, a return of 2% in a normal economy, and a return of 25.2% in a hot economy. There is a 29% probability of a bad economy, a 32% probability of a normal economy and a 39% probability of a hot economy. What is the variance of the stock's returns

Answer 1

17.02

Explanation:

Calculation for What is the variance of the stock's returns

First step is to calculate the E(R) Expected return

E(R) = .29(−0.115) + .32(0.02) + .39(0.252)

E(R) = .0713*100

E(R)=7.13%

Now let calculate the variance

σ2 = .29(−0.115 −0.0713.)^2 + 32(0.02−0.0713 )^2 + .39(0.252 −0.0713 )^2

σ2 = .1702*100

σ2=17.02%

Therefore the variance of the stock's returns will be 17.02%