Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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
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. ) |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started