Variance and standard deviation (expected). Bacon and Associates, a famous Northwest think tank, has provided probability estimates for the four potential economic states for the coming year. The probability of a boom economy is 23%, the probability of a stable growth economy is 40%, the probability of a stagnant economy is 23%, and the probability of a recession is 14%. Calculate the variance and the standard deviation of the three investments: stock, corporate bond, and government bond. If the estimates for both the probabilities of the economy and the returns in each state of the economy are correct, which investment would you choose, considering both risk and return? Investment Forecasted Returns for Each Economy Boom Stable Growth Stagnant Recession Stock 29% 15% 7% −13% Corporate bond 9% 7% 5% 3% Government bond 8% 6% 4% 2% Hint: Make sure to round all intermediate calculations to at least seven (7) decimal places. What is the variance of the stock investment? (Round to five decimal places.) What is the standard deviation of the stock investment? (Round to two decimal places.) What is the variance of the corporate bond investment? (Round to five decimal places.) What is the standard deviation of the corporate bond investment? (Round to two decimal places.) What is the variance of the government bond investment? (Round to five decimal places.) What is the standard deviation of the government bond investment? (Round to two decimal places.)
Variance and standard deviation (expected). Bacon and Associates, a famous Northwest think tank, has provided probability estimates for the four potential economic states for the coming year. The probability of a boom economy is 23%, the probability of a stable growth economy is 40%, the probability of a stagnant economy is 23%, and the probability of a recession is 14%. Calculate the variance and the standard deviation of the three investments: stock, corporate bond, and government bond. If the estimates for both the probabilities of the economy and the returns in each state of the economy are correct, which investment would you choose, considering both risk and return? Investment Forecasted Returns for Each Economy Boom Stable Growth Stagnant Recession Stock 29% 15% 7% −13% Corporate bond 9% 7% 5% 3% Government bond 8% 6% 4% 2% Hint: Make sure to round all intermediate calculations to at least seven (7) decimal places. What is the variance of the stock investment? (Round to five decimal places.) What is the standard deviation of the stock investment? (Round to two decimal places.) What is the variance of the corporate bond investment? (Round to five decimal places.) What is the standard deviation of the corporate bond investment? (Round to two decimal places.) What is the variance of the government bond investment? (Round to five decimal places.) What is the standard deviation of the government bond investment? (Round to two decimal places.)
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
Related questions
Question
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Variance and standard deviation
(expected).
Bacon and Associates, a famous Northwest think tank, has provided probability estimates for the four potential economic states for the coming year. The probability of a boom economy is
23%,
the probability of a stable growth economy is
40%,
the probability of a stagnant economy is
23%,
and the probability of a recession is
14%.
Calculate the variance and the standard deviation of the three investments: stock, corporate bond, and government bond. If the estimates for both the probabilities of the economy and the returns in each state of the economy are correct, which investment would you choose, considering both risk and return? |
Investment
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||||||
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Boom
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Stable
Growth
|
Stagnant
|
Recession
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|||||
|
Stock
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29%
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15%
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|
7%
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−13%
|
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|
Corporate bond
|
9%
|
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7%
|
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5%
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3%
|
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Government bond
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8%
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6%
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4%
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2%
|
|
Hint: Make sure to round all intermediate calculations to at least seven (7) decimal places.
What is the variance of the stock investment?
What is the standard deviation of the stock investment?
What is the variance of the corporate bond investment?
What is the standard deviation of the corporate bond investment?
What is the variance of the government bond investment?
What is the standard deviation of the government bond investment?
If the estimates for both the probabilities of the economy and the returns in each state of the economy are correct, which investment would you choose, considering both risk and return? (Select the best response.)
The stock investment would be the best choice because it has the highest volatility and therefore the best chance of a high return.
The corporate bond would be the best choice because it has the highest expected return and the lowest risk.
The government bond would be the best choice because it has the lowest risk.
There is not enough information to make this decision.
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