The Rate of Return on the Common Stock of Flowers

question 3

Multiple Choice

The rate of return on the common stock of Flowers by Flo is expected to be 14% in a boom economy,8% in a normal economy,and only 2% in a recessionary economy. The probabilities of these economic states are 20% for a boom,70% for a normal economy,and 10% for a recession. What is the variance of the returns on the common stock of Flowers by Flo?

• A) .001044
• B) .001280
• C) .001863
• D) .002001
• E) .002471

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Definitions:

Interest Rate

The financial charge for borrowing resources, represented as a percentage of the initial loan amount.

Account

A record that keeps track of financial transactions, investments, or the financial state of an individual, institution, or company.

Utility Function

A mathematical representation used in economics to model satisfaction or preference that a consumer derives from the consumption of goods and services.

Risk Averse

A behavioral tendency to prefer avoiding losses over acquiring equivalent gains.