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Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession .2 -5% 14%...

  1. Consider the following scenario analysis:

Rate of Return

Scenario

Probability

Stocks

Bonds

Recession

.2

-5%

14%

Normal economy

.6

15%

8%

Boom

.2

25%

4%
  1. Is it reasonable to assume that bonds will provide higher returns in recession than in booms?
  2. Calculate the expected rate of return and standard deviation for each investment?
  3. Which invest would you prefer? Why?
  1. Use the data in the previous problem (problem 8) and consider a portfolio with weights of .60 in stocks and .40 in bonds.
  1. What is the rate of return on the portfolio in each scenario?
  2. What are the expected rate of return and standard deviation of the portfolio?
  3. Would you prefer to invest in the portfolio, in stocks only, or in bonds only?
  4. Calculate the correlation coefficient for the bond and stock returns?

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Expert Solution

jeff jeffy answered 2 years ago
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