Question

Please solve it by hand or typing, don't use EXCEL.

1. Suppose you have the expectations of the HPR on stock market as follows: State of Economy Recession Normal growth Expansion Probability 0.2 0.7 0.1 HPR -12% 8% 16% A. Compute the mean of HPR on stocks. (3pts) B. Compute the standard deviation of the HPR on stocks. (5pts)

Answer 1

A. COMPUTE THE HPR

STATE OF ECONOMY	PROBABILITY	HPR	HPR ON STOCKS
RECESSION	0.2	-12%	-2.4
NORMAL GROWTH	0.7	8%	5.6
EXPANSION	0.1	16%	1.6
TOTAL			4.8%

B. STANDARD DEVIATION

STATE OF ECONOMY	PROBABILITY	HPR(X)	HPR ON STOCKS(Y)	(X-Y)	(X-Y)2	PROB* (X-Y)2
RECESSION	0.2	-12%	-2.4	-9.6	92.16	18.432
NORMAL GROWTH	0.7	8%	5.6	2.4	5.76	4.032
EXPANSION	0.1	16%	1.6	12.4	153.76	15.376
TOTAL			4.8%			37.84

STANDARD DEVIATION = UNDER ROOT 37.84/3 = UNDER ROOT 12.61

STANDARD DEVIATION= 3.55