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
a. What is the rate of return on the portfolio in each scenario?
b. What is the expected rate of return and standard deviation of the portfolio?
c. Would you prefer to invest in the portfolio, in stocks only, or in bonds only?
In an Excel spreadsheet, the solution is clearly laid out will all the calculations necessary to understand the solution.