Variance and standard deviation

(expected).

Bacon and Associates, a famous Northwest think tank, has provided probability estimates for the four potential economic states for the coming year in the following table:

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. The probability of a boom economy is

22%,

the probability of a stable growth economy is

44%,

the probability of a stagnant economy is

23%,

and the probability of a recession is

11%.

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?

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.

Forecasted Returns for Each Economy
Boom		Stable Growth		Stagnant		Recession
Stock	30%		14%		5%		13%
Corporate bond	10%		7%		5%		3%
Government bond	9%		6%		4%		2%