Variance and standard deviation (expected). Hull Consultants, a famous think tank in the Midwest, has...
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Variance and standard deviation (expected). Hull Consultants, a famous think tank in the Midwest, has provided probability estimates for the four potential economic states for the coming year. The probability of a boom economy is 14%, the probability of a stable growth economy is 15%, the probability of a stagnant economy is 45%, and the probability of a recession is 26%. 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? Boom Investment Stock Corporate bond Government bond Forecasted Returns for Each Economy Stable Growth Stagnant 13% 2% 8% 6% 7% 5% 23% 10% 9% Recession 13% 3% 2%
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