The Rate of Return on the Common Stock of Lancaster

question 2

Multiple Choice

The rate of return on the common stock of Lancaster Woolens is expected to be 18 percent in a boom economy, 8 percent in a normal economy, and only 2 percent in a recessionary economy. The probabilities of these economic states are 12 percent for a boom and 10 percent for a recession. What is the variance of the returns on this common stock?

• A) .001150
• B) .001306
• C) .001524
• D) .001389
• E) .001421

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Definitions:

Percent Equivalent

The fractional amount expressed as a part of one hundred.

Compound Interest

This form of interest computation involves calculating interest on both the initial principal amount and any interest that has accrued in the past periods on a loan or deposit.

Percent Equivalent

The numeric representation of a ratio or fraction as a part of 100.

Fraction

A numerical quantity that is not a whole number, represented by two numbers divided by a line, indicating part of a whole.