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If the economy booms, RTF, Inc., stock is expected to return 12 percent. If the economy...

If the economy booms, RTF, Inc., stock is expected to return 12 percent. If the economy goes into a recessionary period, then RTF is expected to only return 4 percent. The probability of a boom is 76 percent while the probability of a recession is 24 percent. What is the variance of the returns on RTF, Inc., stock? Multiple Choice .001167 .000887 .034167 .050400

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Answer #1

E(r)=(0.76*0.12)+(0.24*0.04)

=0.0912+0.0096

=0.1008


variance=0.76* (0.12-0.1008)^2 +0.24* (0.04-0.1008)^2

= 0.0002801664+0.0008871936

=0.001167

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