Question

Consider the following scenario analysis:

		Rate of Return
Scenario	Probability	Stocks		Bonds
Recession	0.20	–6	%	18	%
Normal economy	0.50	19		11
Boom	0.30	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, as per the table t bonds have higer return in recession and lower return in boom compared to stock

b

Stocks
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Recession	0.2	-6	-1.2	-22.1	0.0097682
Normal	0.5	19	9.5	2.9	0.0004205
Boom	0.3	26	7.8	9.9	0.0029403
	Expected return %=	sum of weighted return =	16.1	Sum=Variance Stocks=	0.01313
			Standard deviation of Stocks%	=(Variance)^(1/2)	11.5
Bonds
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Recession	0.2	18	3.6	6.5	0.000845
Normal	0.5	11	5.5	-0.5	0.0000125
Boom	0.3	8	2.4	-3.5	0.0003675
	Expected return %=	sum of weighted return =	11.5	Sum=Variance Bonds=	0.00123
			Standard deviation of Bonds%	=(Variance)^(1/2)	3.5