37 Part 2 138 The client also owns a bond portfolio with $1 million invested in zero coupon Treasury bonds that mature in 10 years. Unfortunately, Congress and the President are engaged in an acrimonious dispute over the budget and the debt celling. The outcome of the dispute, which will not be resolved until the end of the year, will have a big impact on interest rates one year from now. Your first task is to determine the risk of the client's bond portfolio. After consulting with the economists at your firm, you have specified 5 possible scenarios for the resolution of the dispute at the end of the year. For each scenario, you have estimated the probability of the scenario occurring and the impact on interest rates and bond prices if the scenario occurs. Given this information, you have calculated the rate of return on 10-year zero coupon Treasury bonds for each scenario. The probabilities and returns are shown further below. 39 40 You are given the probability distribution below with 5 scenarios during the next year for 10-year zero coupon bonds. 41 Use the scenario data to calculate the expected rate of return for the 10-year zero coupon Treasury bonds during the next year 42 as well as the variance and standard deviation of the bond's return for the next year. You will present the results to your client. 43 44 Inputs: Deviation from Expected Probability of Scenario Rate of Return Return 45 Scenario 46 Worst Case 0.05 -15% 47 Poor Case 0.15 -5% 48 Most Likely 0.50 3% 49 Good Case 0.20 50 Best Case 0.10 151 1.00 152 153 154 Expected Return 155 Variance 156 Standard Deviation 157 10% 15% 10 points possible