Question

1. Consider the following scenario analysis:

		Rate of Return
Scenario	Probability	Stocks	Bonds
Recession	.2	-5%	14%
Normal economy	.6	15%	8%
Boom	.2	25%	4%

1. Is it reasonable to assume that bonds will provide higher returns in recession than in booms?
2. Calculate the expected rate of return and standard deviation for each investment?
3. Which invest would you prefer? Why?

2. Use the data in the previous problem (problem 8) and consider a portfolio with weights of .60 in stocks and .40 in bonds.

1. What is the rate of return on the portfolio in each scenario?
2. What are the expected rate of return and standard deviation of the portfolio?
3. Would you prefer to invest in the portfolio, in stocks only, or in bonds only?
4. Calculate the correlation coefficient for the bond and stock returns?

Answer 1