Suppose your expectations regarding the stock market are as follows State of the Economy Boom Normal growth Recession 0.2 0.6 0.2 42% 17 E(r) = Σ p(s) r(s) 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

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## Solution

State of Economy

Probability

HPR

Boom

0.2

42%

Normal Growth

0.6

23%

Recession

0.2

-17%

MEAN:

Expected Return = (0.2*42%)+(0.6*23%)+(0.2*(-17%))

mean=

18.80%

Variance = [0.2*{(42%-18.80%)^2}}+[0.6*{(23%-18.80%)^2}]+[0.2*{(-17%-18.80%)^2}]

variance =

3.7456%

Standard Deviation = sqrt (Variance)

Standard Deviation =

19.35%

Answer:

MEAN

18.80%

STANDARD DEVIATION

19.35%