What Is the Variance of the Returns on a Security

question 54

Multiple Choice

What is the variance of the returns on a security given the following information?
$\begin{array}{lcc}\text { State of the Economy }&\text { Probability}&\text { E(R) }\\\text { Boom } & .25 & 16\% \\\text { Normal } & .45 & 10\% \\\text { Recession } & .30 & -8 \%\end{array}$

• A)48.18%
• B)56.23%
• C)64.38%
• D)72.87%
• E)90.99%

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Definitions:

STRIPS

Separate Trading of Registered Interest and Principal of Securities; a form of a bond that separates its interest payments from its principal repayment obligation, enabling investors to hold and trade them separately.

Expectations Theory

A theory related to the term structure of interest rates, suggesting that the long-term interest rates reflect expected future short-term interest rates.

Forward Rate

The agreed-upon exchange rate for a currency, security, or commodity to be delivered and paid for at a future date, used in forward contracts.

Zero-coupon Bonds

Bonds that are issued at a discount to their face value and do not pay interest during their life but are redeemed at full face value at maturity.