Question
Consider the following scenario analysis: Rate of Return Probability Stocks Bonds Recession 0.2 -5% 17% Normal economy 0.5 18 11 Boom 0.3 23 4 Assume
Consider the following scenario analysis:
Rate of Return
Probability Stocks Bonds
Recession 0.2 -5% 17%
Normal economy 0.5 18 11
Boom 0.3 23 4
Assume a portfolio with weights of 0.60 in stocks and 0.40 in bonds.
a.What is the rate of return on the portfolio in each scenario? (Enter your answer as a percent rounded to 1 decimal place.)
Answer: Rate of return
Recession _______%
Normal economy _______%
Boom _______%
b.What are the expected rate of return and standard deviation of the portfolio?(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Answer:
Expected return _______%
Standard deviation _______%
c.Would you prefer to invest in the portfolio, in stocks only, or in bonds only? Explain the benefit of diversification.
Answer: Invest in Stock Only; Bond Only or Portfolio?
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