Question
You implement a moderate aggressive strategy: investing 60% in stocks and 40% in bonds. The possible annual returns of stocks and bonds are dependent on
You implement a moderate aggressive strategy: investing 60% in stocks and 40% in bonds.
The possible annual returns of stocks and bonds are dependent on the market situations:
Probability | Stock returns | Bond returns | |
Market is Up | 0.65 | 20% | 3% |
Market is Down (Recessions) | 0.35 | -30% | 5% |
The column "probability" shows the "chance" that the market is up or down. For example, 65% indicates that there is 65% chance that the market is up.
Answer the following questions:
1. What is the expected return of the stock ? What is the expected return of the bond?
2. Based on your answers in Q1, what is the weighted average return of your portfolio? (hint: you invest 60% in stocks and 40% in bonds)?
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