Consider the following scenario:       Rate of Return  Scenario  Prob.  Stocks  Bonds  Recession  .20      -5%     14% Normal  .    60      15%      8% Boom       .20        25%     4%___  1. What is the expected return for each investment?  Bonds: Stocks: Portfolio (40% in bonds, 60% in stocks):  2. What is the risk for each investment?  Bonds: Stocks: Portfolio (40% in bonds, 60% in stocks):  3. Which investment do you prefer?  A. Bonds B. Stocks C. Portfolio

If a portfolio manager expects the market to go down by 2% next year, which stock should the manager buy? (these are betas) A. -1B. - .5 C. OD. 1E. 2

Consider the following scenario analysis: Scenario Recession Normal economy Boom Probability 0.20 0.60 0.20 Required A Required B Required C Rate of Return Stocks -7% 22% 33% Stocks Bonds 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? Expected Rate of Return 16.4 % 11.4 % Bonds 20% Complete this question by entering your answers in the tabs below. 11% 7% You received partial credit in the previous attempt. 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. Standard Deviation 12.5 % 13.9 %

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