Consider the following scenario analysis:

Rate of Return

Scenario Probability Stocks Bonds

Recession 0.2 -7% 15%

Normal economy 0.7 16 7

Boom 0.1 25 6

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.)

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.)

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.