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You are a financial consultants who specializes in creating portfolios based on historical events in particular...

  1. You are a financial consultants who specializes in creating portfolios based on historical events in particular occurrences of recessions, economic expansions, and what is defined as an normal or average economy. Since 1945 the U.S. has experienced 12 economic expansions and 12 recessions. Your clients have asked to forecast expected return and volatility of a portfolio with allocations of 60% in stocks and 40% in bonds.

Scenario

Stocks

Bonds

Recession

-5%

+14%

Average

+15%

+8%

Expansion

+25%

+4%

  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?
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Answer #1

It is better to invest in the portfolio as the risk is decreased and the returns maximized.

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