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Consider the following scenario analysis:
Rate of Return
Scenario Probability Stocks Bonds
Recession 0.2 -7% 15%
Normal economy 0.7 16 7
Boom 0.1 25 6
Assume a portfolio with weights of 0.60 in stocks and 0.40 in bonds.
a. What is the rate of return on the portfolio in each scenario? (Enter your answer as a percent rounded to 1 decimal place.)
b. What are the expected rate of return and standard deviation of the portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
c. Would you prefer to invest in the portfolio, in stocks only, or in bonds only? Explain the benefit of diversification.
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