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Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession .2 -5% 14% Normal economy .6 15% 8% Boom .2 25% 4%
- Consider the following scenario analysis:
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| Rate of Return | |
| Scenario | Probability | Stocks | Bonds |
| Recession | .2 | -5% | 14% |
| Normal economy | .6 | 15% | 8% |
| Boom | .2 | 25% | 4% |
- Is it reasonable to assume that bonds will provide higher returns in recession than in booms?
- Calculate the expected rate of return and standard deviation for each investment?
- Which invest would you prefer? Why?
- Use the data in the previous problem (problem 8) and consider a portfolio with weights of .60 in stocks and .40 in bonds.
- What is the rate of return on the portfolio in each scenario?
- What are the expected rate of return and standard deviation of the portfolio?
- Would you prefer to invest in the portfolio, in stocks only, or in bonds only?
- Calculate the correlation coefficient for the bond and stock returns?
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