Estimate expected return and standard deviation

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Reference no: EM1362072

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

Problem 9-18
Instructions

Enter formulas to calculate the rates of return for each scenario and the expected return on the portfolio.

Weights
Stocks 0.6
Bonds 0.4

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

Recession FORMULA
Normal FORMULA
Boom FORMULA

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

Expected return FORMULA
Variance 0.00000
Standard Deviation 0.000

c. Would you prefer to invest in the portfolio of stocks only or in bonds only?
(These numbers are from problem 17)

Expected Standard
Return Deviation
Stocks 13.00% 9.8
Bonds 8.40% 3.2
Portfolio 10.24% 4.6

Reference no: EM1362072

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