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Risk and Return

Given her evaluation of current economic conditions, Ima Nutt believes there is a 20 percent probability of recession, a 50 percent chance of continued steady growth, and a 30 percent probability of inflationary growth. For each possibility, Ima has developed an interest rate forecast for long-term Treasury bond

Interest Rates:


Recession: 6 percent
Constant growth: 9 percent
Inflation: 14 percent

a. What is the expected interest rate under Ima's forecast?
b. What is the variance and standard deviation of Ima's interest rate forecast?
c. What is the coefficient of variation of Ima's interest rate forecast?
d. If the current long-term Treasury bond interest rate is 8 percent, should Ima consider purchasing a Treasury bond? Why or why not?

Solution Summary

Interest and Treasury Bond Calculation and evaluation