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.

Probability   Economic_Condition   Corporate_Bond_Fund   Common_Stock_Fund
0.01   Extreme_recession -250 -999
0.09   Recession -60 -300
0.20   Stagnation 30 -150
0.30   Slow_growth 80   70
0.35   Moderate_growth 120 200
0.05   High_growth 150 350

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

The expected return for the corporate bond fund is

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

The expected return for the common stock fund is

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

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

The standard deviation for the corporate bond fund is

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

The standard deviation for the common stock fund is

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

If an investor chooses to invest in the common stock fund in​ (c), what should the investor think about the possibility of losing ​$980 of every​ $1,000 invested if there is an extreme​ recession?

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

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

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

D.The investor would need to assess on how to respond to the almost certainty that about​ 10% 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)
-250	-999	0.01	-2.5	-9.99	625	9980.01
-60	-300	0.09	-5.4	-27	324	8100
30	-150	0.2	6	-30	180	4500
80	70	0.3	24	21	1920	1470
120	200	0.35	42	70	5040	14000
150	350	0.05	7.5	17.5	1125	6125
	Total	1	71.6	41.51	9214	44175.01
	E(X)=ΣxP(x,y)=					71.6
	E(X2)=Σx2P(x,y)=					9214
	E(Y)=ΣyP(x,y)=					41.51
	E(Y2)=Σy2P(x,y)=					44175.01
	Var(X)=E(X2)-(E(X))2=					4087.44
	Var(Y)=E(Y2)-(E(Y))2=					42451.93

  expected return for the corporate bond fund=71.60

expected return for the common stock fund =41.51

standard deviation for the corporate bond fund =63.93

standard deviation for the common stock fund =206.04

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