Question

In: Finance

Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.2 -7 %...

Consider the following scenario analysis:

Rate of Return
Scenario Probability Stocks Bonds
Recession 0.2 -7 % 19 %
Normal economy 0.5 20 7
Boom 0.3 23 6

Assume a portfolio with weights of 0.60 in stocks and 0.40 in bonds.

a. What is the rate of return on the portfolio in each scenario?

Rate of Return

Recession_______%

Normal economy_______%

Boom______%

b. What are the expected rate of return and standard deviation of the portfolio?

Expected return____%

Standard deviation_____%

c. Would you prefer to invest in the portfolio, in stocks only, or in bonds only? Explain the benefit of diversification.

Invest in ?

Stock only

Bond Only

Portfolio

Solutions

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