Question

Suppose your expectations regarding the stock market are as follows: State of the Economy Probability HPR...

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 %

Homework Answers

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%
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