A stock will have a loss of 11.5% in a bad economy, a return of 11.3% in a normal economy, and a return of 25.2% in a hot economy.

A stock will have a loss of 11.5% in a bad economy, a return of 11.3% 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? Enter as a decimal to 4 places.

Solutions

Expert Solution

Probability Returns
29% -11.5%
32% +11.3%
39% +25.2%

Expected returns=Sum(Probability*returns)=29%*(-11.5%)+32%*11.3%+39%*25.2%=10.1090%

Variance=Sum(probability*(returns-expected returns)^2)=29%*(-11.5%-10.1090%)^2+32%*(11.3%-10.1090%)^2+39%*(25.2%-10.1090%)^2=0.02246870

jeff jeffy answered 2 years ago

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