Question
Hull Consultants, a famous think tank in the Midwest, has provided probability estimates for the four potential economic states for the coming year. The probability
Hull Consultants, a famous think tank in the Midwest, has provided probability estimates for the four potential economic states for the coming year. The probability of a boom economy is 11%,
the probability of a stable growth economy is 15%, the probability of a stagnant economy is 52%, and the probability of a recession is 22%.
Calculate the variance and the standard deviation of the three investments: stock, corporate bond, and government bond. If the estimates for both the probabilities of the economy and the returns in each state of the economy are correct, which investment would you choose, considering both risk and return?
Investment | Forecasted Returns for Each Economy |
| |||||||
Boom | Stable Growth | Stagnant | Recession | ||||||
Stock | 24% | 14% | 2% | 15% | |||||
Corporate bond | 10% | 8% | 6% | 4% | |||||
Government bond | 9% | 7% | 5% | 3% |
Hint: Make sure to round all intermediate calculations to at least seven (7) decimal places. The input instructions, phrases in parenthesis after each answer box, only apply for the answers you will type.
What is the variance of the stock investment?
(Round to six decimal places.)
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