probability rates of return stocks bonds -5% 14% 15% Scenario Recession Normal economy Boom 0.2 0.6 8% 4% 0.2 25% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? Note that interest rate tends to decrease during recessions, while it tends to increase during booms. b. Calculate the expected rate of return and standard deviation for each investment c. Which investment would you prefer? Suppose that you are risk averse. Consider a portfolio with weights of 60 in stocks and .40 in bonds from now on. d. What is the rate of return on the portfolio in each scenario? e. What are the expected rate of return and standard deviation of the portfolio? f. Would you prefer to invest in the portfolio, in stocks only, or in bonds only? Explain the benefit of diversification