Suppose your expectations regarding the stock market next year can be modeled by the following distribution:

State of the Economy

Probability

HPR (%)

Boom

0.3

44

Normal growth

0.4

14

Recession

0.3

-16

Use the above distribution to compute your expected return of the stock market.

(Do not round intermediate calculations. Round your final answers to two decimal places.)

Expected Return=

%

Another analyst has different opinions regarding the probablities of Boom and Recession states,

, though she agrees with you on all the other numbers in the table.

You know that her expected stock market return is only 10%. What is the Boom probablity she has in mind?

Enter decimals for this box. For example, 0.2, 0.56. Keep two decimal places

Boom Probablity=

(Hint: You will need to reverse engineer the calculation in step 1 and solve an equation if necessary. Remember that all the probabilities in a distribution must sum up to 1. )

Answer rating: 100% (QA)

To compute the expected return of the stock market based on the given distribution we multiply each ... View the full answer