Question

Consider the following scenario analysis:

		Rate of Return
Scenario	Probability	Stocks		Bonds
Recession	0.3	-6	%	14	%
Normal economy	0.6	15		8
Boom	0.1	24		5

Assume a portfolio with weights of 0.60 in stocks and 0.40 in bonds.

a. What is the rate of return on the portfolio in each scenario? (Enter your answer as a percent rounded to 1 decimal place.)

	Rate of Return
Recession	%
Normal Economy	%
Boom	%

b. What are the expected rate of return and standard deviation of the portfolio? (Enter your answer as a percent rounded to 2 decimal places.)

Expected Return	%
Standard Deviation	%

Answer 1

Sscenario			Portfolio return
Recession	14*0.4-6*0.6		2
Normal	15*0.6+8*0.4		12.2
Boom	24*0.6+5*0.4		16.4
Expected return:
	Prob.	Return	Expected Return
Recession	0.3	2%	0.60%
Normal	0.6	12.20%	7.32%
Boom	0.1	16.40%	1.64%
Expected return:			9.56%
Standard Deviation:
Economy	Probability	Return	Deviation	Squared	Sq. Deviation*(P)
	(P)	( R)	E - (R )	Deviation
Recession	0.3	2	7.56	57.1536	17.14608
Normal	0.6	12.2	-2.64	6.9696	4.18176
Boom	0.1	16.4	-6.84	46.7856	4.67856
			VARIANCE		26.0064
Std Deviation = (Variance) ^2 = (26.0064)^2 = 5.10%