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RTF stock is expected to return 11 percent in a normal economy and lose 15 percent...

RTF stock is expected to return 11 percent in a normal economy and lose 15 percent in recession. The probability of a recession is 33 percent while the probability of a booming economy is zero percent. What is the variance of the returns on RTF stock?

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Expert Solution

Step-1:Calculation of expected return of RTF stock
State of economy Probability Return with probability Expected return with probability
a b c=a*b
Normal      0.6700       0.1100      0.0737
Recession      0.3300     -0.1500     -0.0495
Total      1.0000      0.0242
So, expected return is      0.0242
Step-2:Calculation of variance of return
State of economy Probability Return with probability Expected return
a b c d=((b-c)^2)*a
Normal      0.6700       0.1100      0.0242     0.004932
Recession      0.3300     -0.1500      0.0242     0.010014
Total      1.0000      0.0484     0.002343
Thus,
Variance of return is 0.002343

jeff jeffy answered 7 months ago
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