Use the following table: States of the Economy Probability of the State 3-Month T-Bill Large-Company Stock Small-Company Stock Boom 0.3 4% 10% 30% Steady 0.5 4% 5% 20% Recession 0.2 4% 0% 10%
What is the difference between the variances for large- and small-company stocks?
A) 40.25%
B) 36.75%
C) 27.30%
D) 14.90%
Answer: B
Explanation: B)
3-Month
T-Bill Large-Company Stock Small-Company Stock
Er= 4% 5.5% 21%
VAR= 0% 12.25% 49%
STDEV= 0% 3.5% 7%
So 49% - 12.25% = 36.75%.
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