Question

You plan to invest​ $1,000 in a corporate bond fund or in a common stock fund. The table presents the annual return​ (per $1,000) of each of these investments under different economic conditions and the probability that each of these economic conditions will occur. Complete parts​ (a) through​ (d) below.

Probability   Economic_Condition   Corporate_Bond_Fund   Common_Stock_Fund
0.01   Extreme_recession   -200   -980
0.09   Recession   -70   -300
0.15   Stagnation   30   -100
0.35   Slow_growth   80   130
0.30   Moderate_growth   110   150
0.10   High_growth   120   350

Calculate the expected return for the corporate bond fund and for the common stock fund.

The expected return for the corporate bond fund is

​$nothing.

​(Round to the nearest cent as​ needed.)

The expected return for the common stock fund is

​$nothing.

​(Round to the nearest cent as​ needed.)

b. Calculate the standard deviation for the corporate bond fund and for the common stock fund.

The standard deviation for the corporate bond fund is

​$nothing.

​(Round to the nearest cent as​ needed.)

The standard deviation for the common stock fund is

​$nothing.

​(Round to the nearest cent as​ needed.)

c. Would you invest in the corporate bond fund or the common stock​ fund? Explain.

Based on the expected​ value, the

▼

common stock

corporate bond

fund should be chosen. Since the standard deviation for the common stock fund is

▼

significantly greater than

less than half as much as

about the same as

that for the corporate bond​ fund, the common stock fund

▼

is safer than

has the same risk as

is riskier than

the corporate bond fund and an investor

▼

doesn't need to consider

should carefully weigh

the risk when making a decision.

d. If an investor chooses to invest in the common stock fund in​ (c), what should the investor think about the possibility of losing

​$980980

of every​ $1,000 invested if there is an extreme​ recession?

A.

The investor would need to assess on how to respond to the small possibility that about​ 10% of the investment could be lost.

B.

The investor would need to assess on how to respond to the almost certainty that about​ 10% of the investment could be lost.

C.

The investor would need to assess on how to respond to the small possibility that almost all of the investment could be lost.

D.

The investor would need to assess on how to respond to the almost certainty that almost all of the investment could be lost.

Answer 1

x	y	f(x,y)	x*f(x,y)	y*f(x,y)	x^2f(x,y)	y^2f(x,y)
-200	-980	0.0100	-2.0000	-9.8000	400.0000	9604.0000
-70	-300	0.0900	-6.3000	-27.0000	441.0000	8100.0000
30	-100	0.1500	4.5000	-15.0000	135.0000	1500.0000
80	130	0.3500	28.0000	45.5000	2240.0000	5915.0000
110	150	0.3000	33.0000	45.0000	3630.0000	6750.0000
120	350	0.1000	12.0000	35.0000	1440.0000	12250.0000
	Total	1	69.2000	73.7000	8286.0000	44119.0000
	E(X)=ΣxP(x,y)=					69.2000
	E(X2)=Σx2P(x,y)=					8286.0000
	E(Y)=ΣyP(x,y)=					73.7000
	E(Y2)=Σy2P(x,y)=					44119.0000
	Var(X)=E(X2)-(E(X))2=					3497.3600
	Var(Y)=E(Y2)-(E(Y))2=					38687.3100

a)

expected return for the corporate bond fund =69.20

expected return for the common stock fund =73.70

b)

standard deviation for the corporate bond fund =59.14

standard deviation for the common stock fund =196.69

c)

Based on the expected​ value, the common stock fund should be chosen. Since the standard deviation for the common stock fund is significantly greater than that for the corporate bond​ fund, the common stock fund is riskier than the corporate bond fund and an investor should carefully weigh

the risk when making a decision.

d)

c)The investor would need to assess on how to respond to the small possibility that almost all of the investment could be lost.