Assume that the economy can experience high growth, normal growth, slow down or severe recession. Under these conditions you expect the following stock market returns for the coming year:
state of the economy probability return
high growth .25 30%
normal growth .4 10%
slow down .2 2%
severe recession .15 -10
a. compute the expected value of a $1000 investment over the coming year. What is the expected return on investment?
b. compute the standard deviation of the return as a percentage over the coming year.
c. if the risk free return is 9%, what is the risk premium for a stock market investment?