Question

Consider the following scenario analysis: Rate of Return ProbabilityStocks Bonds -6% Scenario Recession 17% 0.20 Normal economy 0.50 20 Boom 0.30 29 6 a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? O No O Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected Rate of Return Standard Deviation Stocks Bonds %

Answer 1

a

yes, because t bond has higher return in recession scenrio

b

Stock
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Recession	0.2	-6	-1.2	-23.5	0.011045
Normal	0.5	20	10	2.5	0.0003125
Boom	0.3	29	8.7	11.5	0.0039675
	Expected return %=	sum of weighted return =	17.5	Sum=Variance Stock=	0.01533
			Standard deviation of Stock%	=(Variance)^(1/2)	12.38
Bond
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Recession	0.2	17	3.4	7.8	0.0012168
Normal	0.5	8	4	-1.2	7.2E-05
Boom	0.3	6	1.8	-3.2	0.0003072
	Expected return %=	sum of weighted return =	9.2	Sum=Variance Bond=	0.0016
			Standard deviation of Bond%	=(Variance)^(1/2)	3.99

	Exp return	std dev
Stock	17.5	12.38
Bond	9.2	3.99