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Splitting PnL variance across a bull and bear regime

A trader's daily PnL depends on the market regime XX. The bull regime occurs with probability 0.60.6 and the bear with probability 0.40.4. Within each regime, E[Ybull]=+2,Var(Ybull)=3,E[Ybear]=3,Var(Ybear)=8.\mathbb{E}[Y \mid \text{bull}] = +2, \quad \operatorname{Var}(Y \mid \text{bull}) = 3, \qquad \mathbb{E}[Y \mid \text{bear}] = -3, \quad \operatorname{Var}(Y \mid \text{bear}) = 8.

Use the law of total variance to find Var(Y)\operatorname{Var}(Y), and say what fraction of the risk comes from the regime itself.

Your answer

This one is open-ended. Work it through, then check your reasoning against the full solution.

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