Consider the following scenario analysis:

Rate of Return

Scenario Probability Stocks Bonds

Recession 0.20 7 % 20 %

Normal economy 0.60 22 % 11 %

Boom 0.20 33 % 7 %

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

No

Yes

b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.)

Expected Rate of Return Standard Deviation

Stocks % %

Bonds % %

c. Which investment would you prefer?

Stock Bond