Question: Question 3 Consider the following scenario analysis: (Total 20 marks) Scenario Recession Normal Boom Probability 0.25 0.35 0.40 Rate of return Stocks Bonds -8% 13%

Question 3 Consider the following scenario analysis: (Total 20 marks) Scenario

Question 3 Consider the following scenario analysis: (Total 20 marks) Scenario Recession Normal Boom Probability 0.25 0.35 0.40 Rate of return Stocks Bonds -8% 13% 15% 8% 30% 5% Assume the portfolio with weights of 60% in stock and 40% in bonds (a) What are the rates of return on the portfolio in each scenario? (7 marks) (b) What are the expected rate of return and standard deviation of the portfolio? (7 marks) (c) Explain with reason what investment you would invest, i.c. in the portfolio, in stocks only, or in bonds only? (6 marks)

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