Consider the following scenario analysis:

Rate of Return

Scenario Probability Stocks Bonds

Recession 0.2 -5 % 13 %

Normal economy 0.7 14 10

Boom 0.1 25 4

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.