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22 March, 23:16

If the economy is normal, Charleston Freight stock is expected to return 14.3 percent. If the economy falls into a recession, the stock's return is projected at a negative 8.7 percent. The probability of a normal economy is 80 percent. What is the variance of the returns on this stock

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  1. 23 March, 00:41
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    0.008464

    Explanation:

    The computation of variance of the returns on this stock is shown below:-

    Probability of recession = 100 - 80

    =20%

    So, expected return = Respective return * Respective probability

    = (0.8 * 14.3) + (0.2 * - 8.7)

    = 9.7%

    Probability Return Probability * (Return - Expected Return) ^2

    0.8 14.3 0.8 * (14.3 - 9.7) ^2 = 16.928

    0.2 - 8.7 0.2 * (-8.7 - 9.7) ^2 = 67.712

    Total = 84.64%

    Standard deviation = (Total probability * (Return - Expected Return) ^2 : Total probability]^ (1 : 2)

    =9.2%

    Now, Variance of the returns = Standard deviation^2

    = 0.092^2

    =0.008464
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