Bacon and Associates, a famous Northwest think tank, has provided probability estimates for the four potential economic states for the coming year in the following table: The probability of a boom economy is 22%, the probability of a stable growth economy is 42%, the probability of a stagnant economy is 23%, and the probability of a recession is 13%. Calculate the variance and the standard deviation of the three investments: stock, corporate bond, and government bond. If the estimates for both the probabilities of the economy and the returns in each state of the economy are correct, which investment would you choose, considering both risk and return?

What is the variance of the stock investment?

%(Round to five decimal places.)

What is the standard deviation of the stock investment?

%(Round to two decimal places.)

What is the variance of the corporate bond investment?

%(Round to five decimal places.)

What is the standard deviation of the corporate bond investment?

%(Round to two decimal places.)

What is the variance of the government bond investment?

%(Round to five decimal places.)

What is the standard deviation of the government bond investment?

%(Round to two decimal places.)

If the estimates for both the probabilities of the economy and the returns in each state of the economy are correct, which investment would you choose, considering both risk and return?(Select the best response.)

A. The stock investment would be the best choice because it has the highest volatility and therefore the best chance of a high return.

B. The government bond would be the best choice because it has the lowest risk.

C. There is not enough information to make this decision.

D. The corporate bond would be the best choice because it has the highest expected return and the lowest risk.

Investment

Forecasted Returns for Each Economy

Stock Corporate Bond Government Bond

Boom 24% 9% 8%

Stable Growth 14% 8% 7%

Stagnant 4% 5% 4%

Recession -12% 4% 3%