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Consider the following scenario analysis: Scenario Probability Rate of Return Stocks Bonds Recession 0.20 -7% 20% Normal economy 0.60 22% 11% Boom 0.20 33% 7%

Consider the following scenario analysis:

Scenario Probability Rate of Return

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?

b. Calculate the expected rate of return and standard deviation for each investment.

c. Which investment would you prefer?

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