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5. The following table gives returns in four possible states of the world for two assets, a bond index and a stock index: 5.5 Measuring
5. The following table gives returns in four possible states of the world for two assets, a bond index and a stock index: 5.5 Measuring Characteristics of Risky Asset Returns - 134 - State Probability Stock Index Return Bond Index Return Depression 0.1 -25% -5% Recession 0.15 -10% 10% Normal 0.5 10% 5% Boom 0.25 40% 4% (a). Calculate the expected returns for the stock and bond in this setting. (b). Calculate the variance and standard deviations for the stock and bond returns in this setting (e). Suppose there is a third, risk-free asset in this setting, that pays an average return of 2% in each state. Compute the risk premium for both the stock and bond indices, as well as the Sharpe ratios
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