In: Finance
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