Math Problem Statement

  Investment Forecasted Returns for Each Economy Boom Stable Growth Stagnant Recession   Stock 22​% 10​% 4​% negative 12​%   Corporate bond 9​% 7​% 5​% 4​%   Government bond 8​% 6​% 4​% 3​%

Bacon and​ Associates, a famous Northwest think​ tank, has provided probability estimates for the four potential economic states for the coming year in the following​ table: LOADING.... The probability of a boom economy is 21 %​, the probability of a stable growth economy is 43​%, the probability of a stagnant economy is 20 %​, and the probability of a recession is 16​%. Calculate the variance and the standard deviation of the three​ investments: stock, corporate​ bond, and government bond. If the estimates for both the probabilities of the economy and the returns in each state of the economy are​ correct, which investment would you​ choose, considering both risk and​ return?   ​Hint: Make sure to round all intermediate calculations to at least seven​ (7) decimal places. The input​ instructions, phrases in parenthesis after each answer​ box, only apply for the answers you will type. Question content area bottom Part 1 What is the variance of the stock​ investment?    enter your response here​% ​(Round to five decimal​ places.)

Solution

Ask a new question for Free

By Image

Drop file here or Click Here to upload

Math Problem Analysis

Mathematical Concepts

Probability
Expected Value
Variance
Standard Deviation

Formulas

Expected Return = Σ(Return in state * Probability of state)
Variance = Σ(Probability of state * (Return in state - Expected Return)^2)
Standard Deviation = sqrt(Variance)

Theorems

-

Suitable Grade Level

College Level (Finance, Probability & Statistics)