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Part 1

You plan to invest $1,000 in a corporate bond fund or in a common stock fund. The table presents the annual return (per $1,000) of each of these investments under different economic conditions and the probability that each of these economic conditions will occur. Complete parts (a) through (d) below.	Probability	Economic Condition	Corporate Bond Fund	Common Stock Fund
0.01	Extreme recession	200		990
0.09	Recession	60		350
0.20	Stagnation	30		50
0.30	Slow growth	70		120
0.25	Moderate growth	100		200
0.15	High growth	110		300

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Part 1

a. Calculate the expected return for the corporate bond fund and for the common stock fund.

The expected return for the corporate bond fund is

$enter your response here.

(Round to the nearest cent as needed.)

Part 2

The expected return for the common stock fund is

$enter your response here.

(Round to the nearest cent as needed.)

Part 3

b. Calculate the standard deviation for the corporate bond fund and for the common stock fund.

The standard deviation for the corporate bond fund is

$enter your response here.

(Round to the nearest cent as needed.)

Part 4

The standard deviation for the common stock fund is

$enter your response here.

(Round to the nearest cent as needed.)

Part 5

c. Would you invest in the corporate bond fund or the common stock fund? Explain.

Based on the expected value, the

common stock

corporate bond

fund should be chosen. Since the standard deviation for the common stock fund is

less than half as much as

about the same as

significantly greater than

that for the corporate bond fund, the common stock fund

is safer than

has the same risk as

is riskier than

the corporate bond fund and an investor

should carefully weigh

doesn't need to consider

the risk when making a decision.

Part 6

d. If an investor chooses to invest in the common stock fund in (c), what should the investor think about the possibility of losing

$990

of every $1,000 invested if there is an extreme recession?

A.

The investor would need to assess on how to respond to the almost certainty that almost all of the investment could be lost.

B.

The investor would need to assess on how to respond to the small possibility that about 10% of the investment could be lost.

C.

The investor would need to assess on how to respond to the almost certainty that about 10% of the investment could be lost.

D.

The investor would need to assess on how to respond to the small possibility that almost all of the investment could be lost.