4.12. ABCO’s head of risk management now warns of focusing on expected returns to the exclusion of risk measures such as variance. ABCO decides to measure return variance.

a. For each ABCO subsidiary, compute the return variance with the standard formula var ( ˜ r)
E[( ˜ r  r )2].

(i) The three economic scenarios are equally likely.
(ii) The good economic scenario is twice as likely as the other two.

b. Show that the alternative variance formula, from exercise 4.1, yields the same results.