Consider the following scenario analysis Rate of Return Scenario Probability Stocks Bonds recession 0.20 -5% 14% Normal economy 0.60...

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Finance

Consider the following scenario analysis
Rate of Return
Scenario Probability Stocks Bonds
recession 0.20 -5% 14%
Normal economy 0.60 15 8
Boom 0.20 25 4
Is it reasonable to assume that treasury bonds will providehigher returns in recessions than in booms?
Calculate the expected rate of return and 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

3.9 Ratings (474 Votes)

Stocks

Bonds

Expected rate of return

13.0%

8.4%

Standard deviation

9.8%

3.2%

Working:

Stocks:

Bonds:

# 1

Calculation of expected return

# 1

Calculation of expected return

Scenerio

Probability

Rate of return

Scenerio

Probability

Rate of return

a*b

Recession

0.20

-0.0500

-0.0100

Recession

0.20

0.1400

0.0280

Normal Economy

0.60

0.1500

0.0900

Normal Economy

0.60

0.0800

0.0480

Boom

0.20

0.2500

0.0500

Boom

0.20

0.0400

0.0080

Total

0.1300

Total

0.0840

# 2

Calculation of variance:

# 2

Calculation of variance:

Scenerio

Probability

Rate of return

Expected return

Scenerio

Probability

Rate of return

Expected return

d=((b-c)^2)*a

Recession

0.20

-0.0500

0.1300

0.00648

Recession

0.20

0.1400

0.0840

0.00063

Normal Economy

0.60

0.1500

0.1300

0.00024

Normal Economy

0.60

0.0800

0.0840

0.00001

Boom

0.20

0.2500

0.1300

0.00288

Boom

0.20

0.0400

0.0840

0.00039

Total

0.00960

Total

0.00102

# 3

Calculation of standard deviation

# 3

Calculation of standard deviation

Standard deviation

Variance

^ (1/2)

Standard deviation

Variance

^ (1/2)

0.00960

^ (1/2)

0.00102

^ (1/2)

0.09798

0.032

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Transcribed Image Text

Consider the following scenario analysisRate of ReturnScenario Probability Stocks Bondsrecession 0.20 -5% 14%Normal economy 0.60 15 8Boom 0.20 25 4Is it reasonable to assume that treasury bonds will providehigher returns in recessions than in booms?Calculate the expected rate of return and return and standarddeviation for each investment. (Do not round intermediatecalculations. Enter your answers as a percent rounded to 1 decimalplace.)

Consider the following scenario analysis Rate of Return Scenario Probability Stocks Bonds recession 0.20 -5% 14% Normal economy 0.60...

Free

90.2K

Verified Solution

Question

Finance

Answer & Explanation Solved by verified expert

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