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Consider the following table regarding returns for stocks and bonds during different economic conditions. Conditions Recession Stable Booming Probability of occurrence 30% 40% 30% Stock
Consider the following table regarding returns for stocks and bonds during different economic conditions. Conditions Recession Stable Booming Probability of occurrence 30% 40% 30% Stock returns -4% 17% 26% Bond returns 12% 8% 3% a) What is the expected rate of return and standard deviation for a portfolio consisting of 100% stocks? What about 100% bonds? b) Consider now a portfolio that is invested 50% stocks and 50% bonds. Compute the expected return and standard deviation. c) As an investor, do you personally prefer this mixed portfolio, a portfolio of 100% stocks, or a portfolio of 100% bonds? Explain your decision
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