Question

If the economy booms, RTF, Inc., stock is expected to return 11 percent. If the economy goes into a recessionary period, then RTF is expected to only return 4 percent. The probability of a boom is 72 percent while the probability of a recession is 28 percent. What is the variance of the returns on RTF, Inc., stock

Answer 1

0.000988

Explanation:

For calculation of the variance of the returns on RTF, Inc., stock first we need to find out the expected rate of return which is shown below:-

Expected rate of return = (Boom percentage × Expected return) + (Recession percentage × Expected return)

= (0.72 × 0.11) + (0.28 × 0.04)

= 9.04%

The Variance of the returns = Boom percentage × (Expected return - Expected rate of return)^2 + Probability recession × (Expected return - Expected rate of return)^2

= 72% × (0.11 - 0.0904)^2 + 28% × (0.04 - 0.0904)^2

= 0.000988