Scenario Recession Normal economy Boom Probability 0.30 0.60 0.10 Kate of Return Stocks -6% 18% 26% Bonds 15% 8% 5% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? b. Calculate the expected rate of return and standard deviation for each investment. c. Which investment would you prefer?
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
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- Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.30 −5 % 18 % Normal economy 0.60 19 % 7 % Boom 0.10 24 % 7 % a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? multiple choice No Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) c. Which investment would you prefer?Consider the following scenario analysis: Scenario Recession Normal economy Boom Probability 0.30 0.50 0.20 Required A Required B Required C a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? b. Calculate the expected rate of return and standard deviation for each investment. c. Which investment would you prefer? Stocks Bonds Rate of Return Stocks -4% Complete this question by entering your answers in the tabs below. Expected Rate of Return 4.3 % 6.2 % 17% 28% Calculate the expected rate of return and standard deviation for each investment. Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place. Bonds 16% 10 % 98 Standard Deviation % %Consider the following scenario analysis: Rate of Return Stocks Scenario Bonds Probability 0.20 Recession -6% 18% Normal economy 0.50 19% 11% Boom 0.30 26% 8% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? O No Ⓒ Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected Rate of Standard Deviation Return Stocks 16.1 % % Bonds 9.7 % % c. Which investment would you prefer? Bond Which investment would you prefer? Stock
- Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.20 −4 % 16 % Normal economy 0.50 18 % 9 % Boom 0.30 29 % 6 % a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? Yes or No b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected Rate of Return Standard deviation Stock Bond c. Which investment would you prefer?Consider the following scenario analysis: Scenario Probability Stocks Bonds Recession 0.30 -6 % +15% Normal Economy 0.30 +14 + 7 Boom 0.40 +26 +5 Calculate the expected rate of return and standard deviation for each investment? Which investment would you prefer?Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.20 -4% 19% Normal economy 0.40 20% 9% Boom 0.40 26% 8% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? O No O Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected Rate of Return Standard Deviation Stocks % % Bonds % c. Which investment would you prefer? Stock Bond Which investment would you prefer?
- Consider the following scenario analysis: Scenario Recession Normal economy Boom. Probability 0.20 Stocks Bonds 0.60 0.20 a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? b. Calculate the expected rate of return and standard deviation for each investment. c. Which investment would you prefer? Expected Rate of Return 1.3% 0.8 % Complete this question by entering your answers in the tabs below. Required A Required B Required C Calculate the expected rate of return and standard deviation for each investment. Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place. Rate of Return. Bonds 14% 8% 4% Standard Deviation Stocks -5% 15% 25% 15.3 Answer is complete but not entirely correct. % 8.1 % Dequired A RequiredReturns State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 Based on the following information, a.What are the covariance and correlation between the returns of the two stocks? b.Calculate the portfolio return and portfolio standard deviation if you invest equally in each asset.Consider the following scenario analysis: RATE OF RETURN Stocks &Bonds Scenario Probability Stocks Bonds Recession 0.20 −9% 21% Normal economy 0.70 22 9% Boom 0.10 25 5% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? Yes or No b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected Rate of Return Standard Deviation Stocks % % Bonds % %
- Q2.a. Consider the following scenario analysis. Scenario Probability Recession Normal Boom 0.20 0.60 0.20 iii. Which investment would Rate of Return you prefer? Stocks -5% +15 +25< Bonds +14% +84 i. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than booms? Explain your argument.< ii. Calculate the expected rate of return and standard deviation for each investment? +4Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.20 -4% 19% Normal economy 20% 26% 0.40 9% Вoom 0.40 8% a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? O No O Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) Expected Rate of Return Standard Deviation Stocks % % Bonds % % c. Which investment would you prefer?Intro We know the following expected returns for stocks A and B, given different states of the economy: State (s) Probability E(rA.s) E(rB,s) -0.1 0.04 0.08 0.05 0.13 0.07 Recession 0.2 Normal 0.5 Expansion 0.3 Part 1 What is the expected return for stock A? 3+ decimals Submit