# Eco4000 You believe that the economy will take three states

Eco4000You believe that the economy will take three states boom; normal; bust with probability of 20%; 50%; 30% The stock index will take three levels under the three states: 2300; 2000; 1800 Q1. What is the expected value of the index? (note this is also the fair value of the index today) Q2. What is the MAD of the index? Q3. What is the stdev of the index?Q4. Assuming price from Q1 is today’s market price. Calculate the returns under the three scenarios. Q5. What is the expected return? Q6. What is the MAD of the return? Q7. What is the stdev of the return? A good economic number is released and you believe that the case for bust is no longer possible. Q8. What is the conditional probability of boom and normal with the new information? Q9. What is the conditional mean value of the index? How much did the index go up from Q1? What is the index return after the announcement? Q10. Given the index level from Q9, what is the return going forward for the two remaining states? Q11. What is the conditional expected return going forward? Q12. What is the conditional MAD of the return? Q13. What is the conditional stdev of the return?