Question

If the economy is normal, Charleston Freight stock is expected to return 16.5%. If the economy falls into a recession, the stock's return is projected at a negative 11.6%. The probability of a normal economy is 80% while the probability of a recession is 20%. What is the variance of the returns on this stock?

Answer 1

The Mean return = 0.8*16.5% + 0.2*-11.6%

The Mean return = 0.132 + (-0.0232)

The Mean return = 0.132 - 0.0232

The Mean return = 0.1088

The Mean return = 10.88%

Variance = 0.8*(16.5%-10.88%)^2 + 0.2*(-11.6%-10.88%)^2

Variance = 0.8*(5.62%)^2 + 0.2*(-0.72%)^2

Variance = 0.012634