Consider the following scenario analysis:

Rate of Return

Scenario Probability Stocks Bonds

Recession 0.20 5% 17%

Normal economy 0.50 20% 9%

Boom 0.30 29% 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 Standard Deviation

of Return

Stocks= ______% ________%

Bonds= ______% _________%

c.Which investment would you prefer? A. more risk-averse, B. less risk-averse, or C. risk-neutral

Stock Bond

a. more risk-averse a. more risk-averse Bond

b. less risk-averse b. less risk-averse

c. risk-neutral c. risk-neutral