Variance and standard deviation (expected). Bacon and Associates, a famous Northwest think tank, has provided probability estimates for the four potential economic states for the coming year. The...

Variance and standard deviation

(expected).

Bacon and Associates, a famous Northwest think tank, has provided probability estimates for the four potential economic states for the coming year. The probability of a boom economy is

23%,

the probability of a stable growth economy is

40%,

the probability of a stagnant economy is

23%,

and the probability of a recession is

14%.

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?

Investment	Forecasted Returns for Each Economy
Boom	Stable Growth	Stagnant	Recession
Stock	29%		15%	7%	−13%
Corporate bond	9%		7%	5%	3%
Government bond	8%		6%	4%	2%

Hint: Make sure to round all intermediate calculations to at least seven (7) decimal places.

What is the variance of the stock investment?

(Round to five decimal places.)

What is the standard deviation of the stock investment?

(Round to two decimal places.)

What is the variance of the corporate bond investment?

(Round to five decimal places.)

What is the standard deviation of the corporate bond investment?

(Round to two decimal places.)

What is the variance of the government bond investment?

(Round to five decimal places.)

What is the standard deviation of the government bond investment?

(Round to two decimal places.)

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? (Select the best response.)

The stock investment would be the best choice because it has the highest volatility and therefore the best chance of a high return.

The corporate bond would be the best choice because it has the highest expected return and the lowest risk.

The government bond would be the best choice because it has the lowest risk.

There is not enough information to make this decision.

Jun 06, 2022

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Variance and standard deviation (expected). Bacon and Associates, a famous Northwest think tank, has provided probability estimates for the four potential economic states for the coming year. The...

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Variance and standard deviation ​(expected). Bacon and​ Associates, a famous Northwest think​ tank, has provided probability estimates for the four potential economic states for the coming year. The...

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Variance and standard deviation (expected). Bacon and Associates, a famous Northwest think tank, has provided probability estimates for the four potential economic states for the coming year. The...