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Lemur [1.5K]
3 years ago
15

If the economy booms, RTF, Inc., stock is expected to return 9 percent. If the economy goes into a recessionary period, then RTF

is expected to only return 4 percent. The probability of a boom is 68 percent while the probability of a recession is 32 percent. What is the variance of the returns on RTF, Inc., stock
Business
1 answer:
ddd [48]3 years ago
8 0

Answer:

    Variance = 5.44

Explanation:

The variance of a portfolio is a measure of the deviation of the returns of the assets making up the portfolio. Using the standard deviation, the variance can be worked out.

<em>Standard deviation is measure of the total risks of an investment. It measures the volatility in return of an investment as a result of both systematic and non-systematic risks.</em>

<em>Non-systematic risk includes risk that are unique to a company like poor management, legal suit against the company . </em>

<em>The variance would be determined as follows:</em>

Variance = Sum of  P×(R- r )^2  

P- probality

R- return on each asset

r- Expected return on portfolio

r =( Wa*Ra) + (Wb*Rb)

Expected return (r) = (9% × 0.68 ) + (4% × 0.32) = 7.4 %

Outcome                 R          (R- r )^2             P×(R- r )^2  

Recession              9              2.56                1.74

Boom                     4             11.56               <u>  3.70 </u>

Total                                                           <u>  5.44 </u>

Variance = Sum of  P×(R- r )^2  

    Variance = 5.44

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