Rate of Return Consider a portfolio with weights of .6 in stocks and .4 in bonds
ID: 2798495 • Letter: R
Question
Rate of Return
Consider a portfolio with weights of .6 in stocks and .4 in bonds.
What is the rate of return on the portfolio in each scenario? (Do not round intermediate calculations. Round your answers to 1 decimal place.)
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.)
Portfolio
Bonds
Stocks
Rate of Return
Scenario Probability Stocks Bonds Recession .20 3 % +18 % Normal economy .60 +19 +9 Boom .20 +28 +5Consider a portfolio with weights of .6 in stocks and .4 in bonds.
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 %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 % Which investment would you prefer?Portfolio
Bonds
Stocks
Explanation / Answer
1.
Recession:
Rate of return = 0.6 * - 0.03 + 0.4 * 0.18
= - 0.018 + 0.072
= 0.054 or 5.4%.
Normal economy:
Rate of return = 0.6 * 0.19 + 0.4 * 0.09
= 0.114 + 0.036
= 0.15 or 15%
Boom:
Rate of return =0.6 * 0.28 + 0.4 * 0.05
= 0.168 + 0.02
= 0.188 or 18.8%
Expected return = 0.20 * 0.054 + 0.60 * 0.15 + 0.20 * 0.188
= 0.0108 + 0.09 + 0.0376
= 0.1384 or 13.84%.
Variance = 0.20 (0.054 - 0.1384)2 + 0.60 (0.15 - 0.1384)2 + 0.20 (0.188 - 0.1384)2
= 0.0014246 + 0.0000807 + 0.0004920
= 0.0019973
Standard deviation = Square root of 0.0019973
= 0.04469 or 4.47%.
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