Consider the following scenario analysis: Scenario Recession Normal economy Boom Probability 0.20 0.60 0.20 Rate of Return Bonds Stocks -5% 15% 25% 14% 8% 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? Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below.
Consider the following scenario analysis: Scenario Recession Normal economy Boom Probability 0.20 0.60 0.20 Rate of Return Bonds Stocks -5% 15% 25% 14% 8% 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? Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below.
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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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:Consider the following scenario analysis:
Scenario
Recession
Normal economy
Boom.
Probability
0.20
Stocks
Bonds
0.60
0.20
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?
Expected
Rate of
Return
1.3%
0.8 %
Complete this question by entering your answers in the tabs below.
Required A Required B Required C
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.
Rate of Return.
Bonds
14%
8%
4%
Standard
Deviation
Stocks
-5%
15%
25%
15.3
Answer is complete but not entirely correct.
%
8.1 %
Dequired A
Required
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