Consider the following scenario analysis: Scenario Recession Normal economy Boom Probability 0.20 0.60 0.20 Rate of Return Stocks -5% 20% 27% Bonds 19% 10% 4% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? b. Calculate the expected rate of return and standard deviation for each investment. c. Which investment would you prefer?

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
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Consider the following scenario analysis:
Scenario
Recession
Normal economy
Boom
Probability
0.20
0.60
0.20
Required A Required B Required C
a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms?
b. Calculate the expected rate of return and standard deviation for each investment.
c. Which investment would you prefer?
Stocks
Bonds
Rate of Return
Stocks
Complete this question by entering your answers in the tabs below.
Expected Rate of
Return
16.4 %
10.6 %
-5%
20%
27%
Calculate the expected rate of return and standard deviation for each investment.
Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.
Bonds
19%
10%
4%
Standard Deviation
%
%
Transcribed Image Text:Consider the following scenario analysis: Scenario Recession Normal economy Boom Probability 0.20 0.60 0.20 Required A Required B Required C a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? b. Calculate the expected rate of return and standard deviation for each investment. c. Which investment would you prefer? Stocks Bonds Rate of Return Stocks Complete this question by entering your answers in the tabs below. Expected Rate of Return 16.4 % 10.6 % -5% 20% 27% Calculate the expected rate of return and standard deviation for each investment. Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place. Bonds 19% 10% 4% Standard Deviation % %
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