6. Suppose that you are deciding between investing in bonds vs. stock. The following is true...

 

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6. Suppose that you are deciding between investing in bonds vs. stock. The following is true about stocks and bond returns and probability of those returns: Stocks: 20% probability of a 15% return; 20% probability of a 12.5% return, a 25% probability of a 8% return, and a 35% probability of a 4.3% return. Bonds: 60% probability of a 10% return and 40% probability of a 7.5% return. a. Calculate the expected rate of return (formula below). Which investment do you choose to maximize your return? b. If there are changes in the stock market, such that there is now a 20% probability of earning 18%, 20% probability of a 12.5% return (same), a 25% probability of a 8% return (same) and a 35% probability of 1.3% return, what would be the expected rate of return on stocks now? C. Continue with part b. How do you think a risk averse investors will react to this change in expected return? What impact do you think this will have on the bonds market and bond yields? Discuss. 6. Suppose that you are deciding between investing in bonds vs. stock. The following is true about stocks and bond returns and probability of those returns: Stocks: 20% probability of a 15% return; 20% probability of a 12.5% return, a 25% probability of a 8% return, and a 35% probability of a 4.3% return. Bonds: 60% probability of a 10% return and 40% probability of a 7.5% return. a. Calculate the expected rate of return (formula below). Which investment do you choose to maximize your return? b. If there are changes in the stock market, such that there is now a 20% probability of earning 18%, 20% probability of a 12.5% return (same), a 25% probability of a 8% return (same) and a 35% probability of 1.3% return, what would be the expected rate of return on stocks now? C. Continue with part b. How do you think a risk averse investors will react to this change in expected return? What impact do you think this will have on the bonds market and bond yields? Discuss.