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    Scenario Analysis

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    Consider the following scenario analysis:

    Rate of Return

    Probability Stocks Bonds
    Recession .20 -5% +14%
    Normal economy .60 +15 +8
    Boom .20 +25 +4
    a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than
    in booms?
    b. Calculate the expected rate of return and standard deviation for each investment.
    c. Which investment would you prefer?

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    Solution Preview

    a. Yes. Look at the data the returns for bonds in recession is 14% while that in boom it is only 4%.
    b. Please refer to the attached spreadsheet for the ...