Consider the following scenario analysis:

1. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms?

2. Calculate the expected rate of return and standard deviation for each investment.

3. Which investment would you prefer?

4. Consider portfolios constructed from the two securities above. Calculate the expected return and standard deviation of each portfolio in the table below 5. Draw an investment opportunity frontier (Figure 11.6 in the textbook). Among the eleven portfolios from part d., which would you NOT choose as your choice portfolio? The portfolio with no stock and the portfolio with 10% in stock wouldnt be chosen since there other portfolios that offer a higher expected return and a lower standard deviation.

Rates of Return Scenario Probability Stocks Bonds Recession 0.25 -14% 6% Normal 0.50 18% 2% Boom 0.25 22% -2% Portfolio Weight for Stock Expected Return Standard Deviation 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 Rates of Return Scenario Probability Stocks Bonds Recession 0.25 -14% 6% Normal 0.50 18% 2% Boom 0.25 22% -2% Portfolio Weight for Stock Expected Return Standard Deviation 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0