The expected rate of return on Delaware Shores Inc. shares is based on three possible states of the economy. These states are boom, normal and recession, which have probabilities of occurrence of 20%, 75% and 5% respectively. Which one of the following statements is correct concerning the variance of
The expected rate of return on Delaware Shores Inc. shares is based on three possible states of the economy. These states are boom, normal and recession, which have probabilities of occurrence of 20%, 75% and 5% respectively. Which one of the following statements is correct concerning the variance of
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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The expected rate of return on Delaware Shores Inc. shares is based on three possible states of the economy. These states are boom, normal and recession, which have probabilities of occurrence of 20%, 75% and 5% respectively. Which one of the following statements is correct concerning the variance of the returns on this share?
a.
The variance must decrease if the probability of occurrence for a boom increases.
b.
The variance will remain constant as long as the sum of the economic probabilities is 100%.
c.
The variance can be positive, zero or negative, depending on the expected rate of return assigned to each economic state.
d.
The variance must be positive provided that each state of the economy produces a different expected rate of return.
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