Question

Suppose the probabilities of the recession or boom are .30, while the probability of a normal period is .40. would you expect the varaince of returns on these 2 investments to be higher or lower?

Answer 1

The standard deviation should decrease because there is now a lower probability of the more extreme outcomes. The expected rate of return on the auto stock is now

How is the variance calculated?

[0.3 × (–8%)] + [.4 × 5%] + [.3 × 18\%] = 5%[.3×(–8%)]+[.4×5%]+[.3×18%] = 5%

The variance is

[.3× (–8 – 5$)^2$] + [.4× (5 – 5$)^2$] + [.3×(18 – 5$)^2$] = 101.4

The standard deviation is √101.4 = 10.07 percent, which is lower than the value assuming equal probabilities of each scenario.

To learn more about variance, refer

https://brainly.ph/question/13423233

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