Consider the following scenario analysis: Scenario Recession Normal economy Boom Probability 0.30 0.50 0.20 Rate of Return Stocks -4% 17% 28% Bonds 16% 10% Required A Required B Required C 98 a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in boom: b. Calculate the expected rate of return and standard deviation for each investment. c. Which investment would you prefer? Complete this question by entering your answers in the tabs below.
Consider the following scenario analysis: Scenario Recession Normal economy Boom Probability 0.30 0.50 0.20 Rate of Return Stocks -4% 17% 28% Bonds 16% 10% Required A Required B Required C 98 a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in boom: b. Calculate the expected rate of return and standard deviation for each investment. c. Which investment would you prefer? Complete this question by entering your answers in the tabs below.
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
Section: Chapter Questions
Problem 1PS
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Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:Consider the following scenario analysis:
Scenario
Recession
Normal economy
Boom
Probability
0.30
0.50
0.20
Required A Required B Required C
a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms?
b. Calculate the expected rate of return and standard deviation for each investment.
c. Which investment would you prefer?
Stocks
Bonds
Rate of Return
Stocks
-4%
Complete this question by entering your answers in the tabs below.
Expected Rate of
Return
4.3 %
6.2 %
17%
28%
Calculate the expected rate of return and standard deviation for each investment.
Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.
Bonds
16%
10 %
98
Standard Deviation
%
%
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