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Assume that an economy can have four states: Severe recession, Mild recession, Normal growth, Boom. Probability of each scenario, stock and bond annual returns in
Assume that an economy can have four states: Severe recession, Mild recession, Normal growth, Boom. Probability of each scenario, stock and bond annual returns in that scenario are provided below. Lets also assume that you are creating a portfolio with 65% stocks and 35% bonds.
Economy State | Probability | Stock Return (%) | Bond Return (%) |
Severe recession | 0.20 | -37 | -9 |
Mild recession | 0.30 | -11 | 15 |
Normal growth | 0.40 | 14 | 8 |
Boom | 0.10 | 30 | -5 |
How much is the expected annual return on Stocks? |
Enter your answer in the following format: + or - 0.1234 |
Hint: Answer is between -0.0189 and -0.0231 |
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