Problem:
Rate of Return
Scenario Probability Stocks Bonds
Recession 0.20 -5% 14%
Normal Economy 0.60 15% 8%
Boom 0.20 25% 4%
Use the data in the above problem and consider a portfolio with weights of .60 in stocks and .40 in bonds
Q1. What is the rate of return on the portfolio in each scenario?
Q2. What is the expected rate of return and standard deviation of the portfolio?
Q3. Would you prefer to invest in the portfolio, in stocks only, or in bonds only?