Consider the following scenario analysis: Rate of Return Stocks Bonds Scenario Recession Probability 0.20 -6% 18% Normal economy 0.50 19% 11% Boom 0.30 26% 8% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? No Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected Rate of Return Standard Deviation Stocks 16.1 % % Bonds 9.7 % % c. Which investment would you prefer? Bond Which investment would you prefer? Stock
Consider the following scenario analysis: Rate of Return Stocks Bonds Scenario Recession Probability 0.20 -6% 18% Normal economy 0.50 19% 11% Boom 0.30 26% 8% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? No Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected Rate of Return Standard Deviation Stocks 16.1 % % Bonds 9.7 % % c. Which investment would you prefer? Bond Which investment would you prefer? Stock
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:### Scenario Analysis and Investment Decision-Making
Consider the following scenario analysis:
| Scenario | Probability | Rate of Return |
|--------------------|-------------|----------------|
| | | Stocks | Bonds |
| Recession | 0.20 | -6% | 18% |
| Normal economy | 0.50 | 19% | 11% |
| Boom | 0.30 | 26% | 8% |
**a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms?**
- Yes
- No
**b. Calculate the expected rate of return and standard deviation for each investment.**
(Note: Do not round intermediate calculations. Enter your answers as a percentage rounded to 1 decimal place.)
| | Expected Rate of Return | Standard Deviation |
|--------------------|-------------------------|--------------------|
| Stocks | 16.1% | |
| Bonds | 9.7% | |
**c. Which investment would you prefer?**
| | Stock | Bond |
|------------------------|-------|------|
| Which investment would you prefer? | | |
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