Question C

Rate of return Scenario Probability Bond Common Stock Recession 0.3 4% - 10% Normal 0.2 5% 10% Boom 6% 30% (a) Calculate the expected rate of return, variance and standard deviation of bond and common stock. (8 marks) 0.5 (b) Do you think the above stocks and bonds is a good combination to form an investment portfolio? Explain why. (6 marks) (c) Assuming you invest in the portfolio with weights of 70% in stock and 30% in bonds. What are the expected rate of return and standard deviation of the portfolio? (8 marks)