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In: Finance

If the economy is normal, Charleston Freight stock is expected to return 16.5 percent.

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? 


A. 0.010346 B. 0.012634 C. 0.013420 D. 0.013927 E. 0.014315

Solutions

Expert Solution

E(X) = sum of P(X) * X

= 0.8 * 0.165 + 0.2 * -0.116

= 0.1088

E(X^2) = sum of P(X) * X^2

=  0.8 * 0.165^2 + 0.2 * (-0.116)^2

= 0.0244712

Variance = E(X^2) - (E(x))^2

= 0.0244712 - 0.1088^2

= 0.012634

choose B)

jeff jeffy answered 2 years ago
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