Currently the level of the S&P 500 Index is 1300, and the yield on the 90-day treasury bill is 2.75%. The following table lists the forecasts of an economist for the S&P 500 in the coming year.

Economic Environment	Probability of Occurance	Expected return of the S&P
Above Average	30%	22%
Average	45%	8%
Poor	25%	-35%

Calculate the expected return and standard deviation for the S&P 500. Construct the Security Market Line graph (from your findings) and show what the market risk premium is. Label your graph to receive full credit.

What would happen to the expected return on stocks if investors perceived an increase in the volatility of stocks? Why?