Question

There are two states of the economy. If the economy is normal, Charleston Freight stock is expected to return 16.5 percent. If the economy falls into a recession, the stock's return is projected at a negative 11.6 percent. The probability of a normal economy is 80 percent while the probability of a recession is 20 percent. What is the variance of the returns on this stock

Answer 1

0.012634

Step-by-step explanation:

Mean return is the expected value, or mean, of all the likely returns of investments comprising a portfolio.

Mean return E(r) = (probability of a normal economy × return of a normal economy) + (probability of economy in recession × return of economy in recession )

Therefore, the mean return E(r) = (0.80 ×0.165) + (0.20 ×-0.116) = 0.1088

Variance = 0.80 (0.165 - 0.1088)^2 + 0.20 (-0.116 - 0.1088)^2 = 0.012634

The variance of the returns on this stock is 0.012634