Question

What is the variance of the returns on a security given the following information?

State of the Economy	Probability	E(R)
Boom	0.25	16	%
Normal	0.45	10	%
Recession	0.30	-8	%

Multiple Choice

• 91.35

• 72.87

• 64.38

• 48.18

• 56.23

Answer 1

Answer: Option A:91.35

Expected Return =

Expected return E(R)= 0.25*16%+0.45*10%+0.3*-8%=6.10%

State of economy	Probability P	E(A)
Boom	0.25	16%
Normal	0.45	10%
Recession	0.3	-8%
Expected return E(R)		6.10%

So Variance V=0.25*(16%-6.10%)^2+0.45*(10%-6.10%)^2+0.3*(-8%-6.10%)^2=91.35