Question

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 70 percent while the probability of a recession is 30 percent. What is the variance of the returns on this stock

Answer 1

Variance of the returns of this stock is 0.01658177

Step-by-step explanation:

Mean return = 0.7 * 16.5% + 0.3*-11.6%

Mean return = 0.1155 - 0.0348

Mean return = 0.0807

Mean return = 8.07%

Variance of the return = 0.7 * (16.5%-8.07%)^2 + 0.3 * (-11.6%-8.07%)^2

Variance of the return = 0.7 * (8.43%)^2 + 0.3 * (-19.67%)^2

Variance of the return = 0.7 * (0.0843)^2 + 0.3 * (-0.1967)^2

Variance of the return = 0.0049745 + 0.011607267

Variance of the return = 0.01658177