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

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Business

Ethan Carrillo

27 December, 19:55

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

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Cristian Johnston · 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