Q No 4: a). Consider the following scenario analysis:

Rate of Return

Probability Stocks Bonds

Recession 0.20 -5% 14%

Normal 0.60 15% 8%

Boom 0.20 25% 4%

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

b. Calculate coefficient of variance of each investment

c. Which investment would you prefer based on standard deviation and CV?

b) Consider a portfolio with weights of .60 in stocks and .40 in bonds given in part a)

a. What is the rate of return on the portfolio in each scenario?

b. What is the expected rate of return and standard deviation of the portfolio?

c. Would you prefer to invest in the portfolio, in stocks only, or in bonds only?