Consider the following scenario analysis:

		Rate of Return
Scenario	Probability	Stocks		Bonds
Recession	0.2	-7	%	19	%
Normal economy	0.5	20		7
Boom	0.3	23		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?

Rate of Return

Recession_______%

Normal economy_______%

Boom______%

b. What are the expected rate of return and standard deviation of the portfolio?

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.

Invest in ?

Stock only

Bond Only

Portfolio