Question

Consider the following scenario analysis:

Answer 1

Based on the scenario analysis on stocks and bonds, we know the following:

• Treasury bonds will provide a higher return in a recession than in a boom.
• The expected return of Bonds is 9.8% and that of stocks is 11.6%.
• The standard deviation of Bonds is 9.24% and that of stock is 11.76%.

What does the scenario analysis on Bonds and Stocks show?

In a recession, Bond returns will be 15%. This is much higher than Bond returns in a boom of only 5%.

The expected return on bonds will be:

= ∑(Probability of Scenario x Returns in scenario)

= (0.30 x 15%) + (0.60 x 8%) + (0.10 x 5%)

= 9.8%

The expected return on stocks will be:

= (0.30 x -6%) + (0.60 x 18%) + (0.10 x 26%)

= 11.6%

Using a spreadsheet, you can input the expected returns of the stocks and the bonds to find the standard deviation to be 9.24% and 11.76%, respectively.

Find out more on stock expected returns at brainly.com/question/18724022.

#SPJ1