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The solution to Return on stocks and bonds

Analyze the risk of a portfolio

Use the data below and consider portfolio weights of .60 in stocks and .40 in bonds.

Rate of Return
Scenario Probability Stocks Bonds
Recession 0.2 -5% 14%
Normal 0.6 15% 8%
Boom 0.2 25% 4%

a. What is the rate of return on the portfolio in each scenario?

b. What is the expected return and standard deviation of the portfolio?

c. Would you prefer to invest in the portfolio of stocks only or in bonds only?

Solution Summary

The expected rate of return and standard deviation for investment in a portfolio of bonds and stocks is calculated, given the probability distribution of return on bonds and stocks.