Question

Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.20 –5 % 17 % Normal economy 0.50 20 9 Boom 0.30 29 7 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 seen from data t bond is performing better in recession compared to boom, Which is expected as investors tend to invest in risk free assets during recession

b

Stocks
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Recession	0.2	-5	-1	-22.7	0.0103058
Normal	0.5	20	10	2.3	0.0002645
Boom	0.3	29	8.7	11.3	0.0038307
	Expected return %=	sum of weighted return =	17.7	Sum=Variance Stocks=	0.0144
			Standard deviation of Stocks%	=(Variance)^(1/2)	12
Bonds
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Recession	0.2	17	3.4	7	0.00098
Normal	0.5	9	4.5	-1	0.00005
Boom	0.3	7	2.1	-3	0.00027
	Expected return %=	sum of weighted return =	10	Sum=Variance Bonds=	0.0013
			Standard deviation of Bonds%	=(Variance)^(1/2)	3.61