Variance and standard deviation ​(expected). Bacon and​ Associates, a famous Northwest think​ tank, has provided probability estimates for the four potential economic states for the coming year. The probability of a boom economy is 23%​, the probability of a stable growth economy is 40​%, the probability of a stagnant economy is 23​%, and the probability of a recession is 14​%. Calculate the variance and the standard deviation of the three​ investments: stock, corporate​ bond, and government bond. If the estimates for both the probabilities of the economy and the returns in each state of the economy are​ correct, which investment would you​ choose, considering both risk and​ return?         Investment Forecasted Returns for Each Economy   Boom Stable Growth Stagnant   Recession   Stock 29​%   15​%   7​%   −13​%     Corporate bond 9​%   7​%   5​%   3​%     Government bond 8​%   6​%   4​%   2​%     ​Hint: Make sure to round all intermediate calculations to at least seven​ (7) decimal places.  What is the variance of the stock​ investment?     ​(Round to five decimal​ places.) What is the standard deviation of the stock​ investment?     ​(Round to two decimal​ places.) What is the variance of the corporate bond​ investment?     ​(Round to five decimal​ places.) What is the standard deviation of the corporate bond​ investment?     ​(Round to two decimal​ places.) What is the variance of the government bond​ investment?     ​(Round to five decimal​ places.) What is the standard deviation of the government bond​ investment?     ​(Round to two decimal​ places.)

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Variance and standard deviation
​(expected).
Bacon and​ Associates, a famous Northwest think​ tank, has provided probability estimates for the four potential economic states for the coming year. The probability of a boom economy is
23%​,
the probability of a stable growth economy is
40​%,
the probability of a stagnant economy is
23​%,
and the probability of a recession is
14​%.
Calculate the variance and the standard deviation of the three​ investments: stock, corporate​ bond, and government bond. If the estimates for both the probabilities of the economy and the returns in each state of the economy are​ correct, which investment would you​ choose, considering both risk and​ return?  
 
 
  Investment
Forecasted Returns for Each Economy
 
Boom
Stable
Growth
Stagnant
 
Recession
  Stock
29​%
 
15​%
 
7​%
 
−13​%
 
  Corporate bond
9​%
 
7​%
 
5​%
 
3​%
 
  Government bond
8​%
 
6​%
 
4​%
 
2​%
 
 
​Hint: Make sure to round all intermediate calculations to at least seven​ (7) decimal places. 
What is the variance of the stock​ investment?
 
 
​(Round to five decimal​ places.)
What is the standard deviation of the stock​ investment?
 
 
​(Round to two decimal​ places.)
What is the variance of the corporate bond​ investment?
 
 
​(Round to five decimal​ places.)
What is the standard deviation of the corporate bond​ investment?
 
 
​(Round to two decimal​ places.)
What is the variance of the government bond​ investment?
 
 
​(Round to five decimal​ places.)
What is the standard deviation of the government bond​ investment?
 
 
​(Round to two decimal​ places.)
If the estimates for both the probabilities of the economy and the returns in each state of the economy are​ correct, which investment would you​ choose, considering both risk and​ return?  ​(Select the best​ response.)
 
 
A.
The stock investment would be the best choice because it has the highest volatility and therefore the best chance of a high return.
 
B.
The corporate bond would be the best choice because it has the highest expected return and the lowest risk.
 
C.
The government bond would be the best choice because it has the lowest risk.
 
D.
There is not enough information to make this decision.
 
 

 

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