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Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.20 –5 %...

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Consider the following scenario analysis: Rate of ReturnScenario Probability Stocks Bonds Recession 0.20 –5 % 17 % Normaleconomy 0.50 20 9 Boom 0.30 29 7 a. Is it reasonable to assume thatTreasury bonds will provide higher returns in recessions than inbooms? No Yes b. Calculate the expected rate of return and standarddeviation for each investment. (Do not round intermediatecalculations. Enter your answers as a percent rounded to 1 decimalplace.)

Answer & Explanation Solved by verified expert
3.7 Ratings (575 Votes)

a

Yes as seen from data t bond is performing better in recession compared to boom, Which is expected as investors tend to invest in risk free assets during recession

b

Stocks
Scenario Probability Return% =rate of return% * probability Actual return -expected return(A)% (A)^2* probability
Recession 0.2 -5 -1 -22.7 0.0103058
Normal 0.5 20 10 2.3 0.0002645
Boom 0.3 29 8.7 11.3 0.0038307
Expected return %= sum of weighted return = 17.7 Sum=Variance Stocks= 0.0144
Standard deviation of Stocks% =(Variance)^(1/2) 12
Bonds
Scenario Probability Return% =rate of return% * probability Actual return -expected return(A)% (B)^2* probability
Recession 0.2 17 3.4 7 0.00098
Normal 0.5 9 4.5 -1 0.00005
Boom 0.3 7 2.1 -3 0.00027
Expected return %= sum of weighted return = 10 Sum=Variance Bonds= 0.0013
Standard deviation of Bonds% =(Variance)^(1/2) 3.61

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Transcribed Image Text

Consider the following scenario analysis: Rate of ReturnScenario Probability Stocks Bonds Recession 0.20 –5 % 17 % Normaleconomy 0.50 20 9 Boom 0.30 29 7 a. Is it reasonable to assume thatTreasury bonds will provide higher returns in recessions than inbooms? No Yes b. Calculate the expected rate of return and standarddeviation for each investment. (Do not round intermediatecalculations. Enter your answers as a percent rounded to 1 decimalplace.)

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