The Rate of Return on the Common Stock of Lancaster

question 5

Multiple Choice

The rate of return on the common stock of Lancaster Woolens is expected to be 21 percent in a boom economy,11 percent in a normal economy,and only 3 percent in a recessionary economy.The probabilities of these economic states are 10 percent for a boom,70 percent for a normal economy,and 20 percent for a recession.What is the variance of the returns on this common stock?

• A)0.002150
• B)0.002606
• C)0.002244
• D)0.002359
• E)0.002421

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Definitions:

Marginal Revenue Product

The boost in revenue achieved by adding one more unit of a factor involved in production.

Marginal Product

The additional output that results from using one more unit of a particular input, keeping other inputs constant.

Variable Input

Any resource used in production whose quantity can be changed in the short term to increase or decrease output.

Marginal Revenue Product Curve

A graphical representation showing how the additional revenue generated by employing one more unit of a resource varies with the quantity of the resource employed.