You are trying to set up a portfolio that consists of a corporate bond fund and

Question

You are trying to set up a portfolio that consists of a corporate bond fund and a common stock fund. The following information about the annual return (per 1000) of each of these investments under different economic conditions is available, along with the probability that each of these economic conditions will occur.

Probability State of the Economy Corporate Bonds Common Stocks

0.10 Recession -$30 -$150

0.15 Stagnation $50 -$20

0.35 Slow Growth $90 $120

0.30 Moderate Growth $100 $100

0.10 High Growth $110 $250

A) Compute the expected return for corporate bonds and common stocks

B) Compute the standard deviation for each fund

C) Which would you invest? Why?

Explanation / Answer

You are trying to set up a portfolio that consists of a corporate bond fund and

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