Assume that an economy can have four states: Severe recession, Mild recession, Normal growth, Boom. Probability of each scenario, stock and bond annual returns in that scenario are provided below. Let's also assume that you are creating a portfolio with 65% stocks and 35% bonds. Economy State Severe recession Probability 0.20 Stock Return (%) Bond Return (%) -37 -9 Mild recession 0.30 -11 15 Normal growth 0.40 14 8 Boom 0.10 30 -5 How much is the annual standard deviation of Stock returns? Enter your answer in the following format: 0.1234 Hint: Answer is between 0.1938 and 0.2373

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter5: Business And Economic Forecasting
Section: Chapter Questions
Problem 2E
Question
Assume that an economy can have four states: Severe recession, Mild recession, Normal growth, Boom.
Probability of each scenario, stock and bond annual returns in that scenario are provided below.
Let's also assume that you are creating a portfolio with 65% stocks and 35% bonds.
Economy State
Severe recession
Probability
0.20
Stock Return (%) Bond Return (%)
-37
-9
Mild recession
0.30
-11
15
Normal growth
0.40
14
8
Boom
0.10
30
-5
How much is the annual standard deviation of Stock returns?
Enter your answer in the following format: 0.1234
Hint: Answer is between 0.1938 and 0.2373
Transcribed Image Text:Assume that an economy can have four states: Severe recession, Mild recession, Normal growth, Boom. Probability of each scenario, stock and bond annual returns in that scenario are provided below. Let's also assume that you are creating a portfolio with 65% stocks and 35% bonds. Economy State Severe recession Probability 0.20 Stock Return (%) Bond Return (%) -37 -9 Mild recession 0.30 -11 15 Normal growth 0.40 14 8 Boom 0.10 30 -5 How much is the annual standard deviation of Stock returns? Enter your answer in the following format: 0.1234 Hint: Answer is between 0.1938 and 0.2373
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