Question

Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.20 −4 % 19 % Normal economy 0.40 20 % 9 % Boom 0.40 26 % 8 % a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? No Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.)

Answer 1

a

yes because in recession bonds have higher return of 19% compared to stocks with -4%

b

Stock
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Recession	0.2	-4	-0.8	-21.6	0.0093312
Normal	0.4	20	8	2.4	0.0002304
Boom	0.4	26	10.4	8.4	0.0028224
	Expected return %=	sum of weighted return =	17.6	Sum=Variance Stock=	0.01238
			Standard deviation of Stock%	=(Variance)^(1/2)	11.13
Bond
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Recession	0.2	19	3.8	8.4	0.0014112
Normal	0.4	9	3.6	-1.6	0.0001024
Boom	0.4	8	3.2	-2.6	0.0002704
	Expected return %=	sum of weighted return =	10.6	Sum=Variance Bond=	0.00178
			Standard deviation of Bond%	=(Variance)^(1/2)	4.22