Question

Suppose your expectations regarding the stock market are as follows:

State of the Economy	Probability	HPR
Boom	0.3	44%
Normal growth	0.6	22
Recession	0.1	-15

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 of state of the economy [p]	HPR [%] if the state occurs [r]	E[r] = p*r	d = r-E[r]	d^2	p*d^2
Boom	0.30	44	13.20	$          19.10	364.81	109.44
Normal growth	0.60	22	13.20	$           -2.90	8.41	5.05
Recession	0.10	-15	-1.50	$         -39.90	1592.01	159.20
			24.90			273.69
Expected return			24.90%
SD = 273.69^0.5 =			16.54%