Question

Suppose your expectations regarding the stock market are as follows: State of the Economy Probability Boom 0.3 Normal growth 0.3 Recession 0.4 HPR 39% 21 -18 E(-) = P(G)() Var(-) = 92 = Š PO[r®) – E("P SD(Y) = g = V Var(r) Use above equations to compute the mean and standard deviation of the HPR on stocks. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Mean Standard deviation

Answer 1

State of economy	Probability	HPR	p(s)*r(s)	r(s)-E( r)^2	p(s)*[r(s)-E( r)^2]
Boom	0.3	39%	0.117	37.83%	0.1135
Normal Growth	0.3	21%	0.063	19.83%	0.0595
Recession	0.4	-18%	-0.072	-19.17%	-0.0767
		E( r )	10.80%	Var( r )	0.0963

Standard deviation = Sqrt(Var(r)) = 0.0963^(1/2) = 31.04%

Mean E(r) = 10.80%