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?