.Rate of Return Scenario . .Probability. .Stocks. .Bonds. Recession .20 7 % +20

Question

.Rate of Return

Scenario . .Probability. .Stocks. .Bonds.

Recession .20 7 % +20 %

Normal economy .60 +22% +11%

Boom .20 +33% +7%

Consider a portfolio with weights of .7 in stocks and .3 in bonds.

a. What is the rate of return on the portfolio in each scenario? (Do not round intermediate calculations. Round your answers to 1 decimal place.)

Scenario. Rate of Return

Recession _________%

Normal economy ______%

Boom _________%

b. What are the expected rate of return and standard deviation of the portfolio? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Expected rate of return __________%

Standard deviation __________%

c. Which investment would you prefer?

Portfolio Bonds Stocks

Explanation / Answer

a. The rate of return on the portfolio in each scenario:

Recession : -0.07 * 0.7 + 0.2 * 0.3 = 0.011 or 1.1%

  Normal economy: 0.22 * 0.7 + 0.11 * 0.3 = 0.214 or 21.4%

Boom : 0.33 * 0.7 + 0.07 * 0.3 = 0.252 or 25.2%

b.

expected rate of return = 0.181 or 18.10%

standard deviation = SqRt (0.08064/0.477) = 0.4111 or 41.11%

c. Stocks are more preferred for investment purpose being higher return in normal scenario.

probability returns R expected returns deviation (d) d2 Rd2 0.20 0.011 0.0022 -0.40 0.16 0.0044 0.60 0.214 0.1284 0 0 0 0.20 0.252 0.0504 -0.40 0.16 0.04032 0.477 0.181 or 18.10% 0.08064

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.