. Suppose your expectations regarding the stock price are as follows State of the Market Probability Ending Price HPR (including dividends) Boom .35 $140 44.5% Normal growth .30 110 14.0 Recession .35 80 216.5Use Equations 5.11 and 5.12 to compute the mean and standard deviation of the HPR on stocks.

Mean = 0.14

SD = 25.52%

Explanation:

To find the mean:

By using the holding period return;

From the given information; we can compute the table as follows:

State of        Probability        Ending     HPR ( including    p(s) × r(s)

the market                             Price         dividends)

                        p($)                 ($)                   r(s)  

- Boom            0.35               140            44.5                     0.156

- Normal          0.30                110            14.0                     0.042

growth  

- Recession     0.35                   80        -16.5                    -0.058

Total                                                                                    

The standard deviation is calculated by using the formula:

State of          p($)        r(s)     E(r)     r(s) - E(r)     [r(s) - E(r)]²    p(s)*[r(s) - E(r)]²  

the market                  

- Boom            0.35    44.5     14        30.5       930.25        325.59

- Normal          0.30    14.0     14         0            0                  0

growth  

- Recession     0.35     -16.5   14        -30.5     930.25         325.59

Total                                                                                    

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