Rates 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?

Rates of return
Scenario Stocks Bonds Stocks x Weight Bonds x Weight
Recession -5% 14% -0.03 0.056
Normal 15% 8% 0.09 0.032
Boom 25% 4% 0.15 0.016

Weights
Stocks Bonds
0.6 0.4

B. What are the expeceted rates of return and standard deviation of the portfolio

Scenario Probability Stocks Bonds Stocks x Weight Bonds x Weight

Recession 0.2 -5% 14% -0.03 0.056

Normal Economy 0.6 15% 8% 0.09 0.032
Boom 0.2 25% 4% 0.15 0.016

C. Would you prefer to invest in the portfolio, in stock only, or in bonds only? Explain the benefit of diversification.

Based on the analysis, most people would prefer investing in the portfolio over bonds because it yields more. However, I
prefer to invest in the portfolio because my capital will not be invested in just one type of investment. That way I can have a
diverse set of investments even if one stock outperforms the other, it would be minimal risk instead of just investing in one
investment.
 Weights
Stocks Bonds
0.6 0.4

Rate of return
SW + BW Percentage
0.026 2.60%
0.122 12.20%
0.166 16.60%

Expected Rate of return x Sum of

SW + BW Percentage Variance
Return Expected rate of return

0.026 2.60% 0.0052 0.00732736 0.001465472

0.122 12.20% 0.0732 0.00010816 6.4896E-05
0.166 16.60% 0.0332 0.00295936 0.000591872
11.16% 0.00212224

of diversification.

yields more. However, I

ent. That way I can have a
ad of just investing in one
√Variance

4.61%