Chapter 1017 a) Interest rates tend to fall in a recession to promote investment in the country and rise during boom periods. Because bond prices move inversely with interest rates, bonds provide higher returns during recessions when interest rates fall.b) The expected rate of return of Stocks

a)ich provide me a return that compensate the risk taken return from

c. The above calculation suggest that the return from stocks is higher but the risk is also higher similarly, the return from bonds is lower therefore the risk is also lower. As a risk averse investor I will choose bonds over stocks which provide me a return that compensate the risk taken.

18. a) The rate of return on the portfolio in Recession

The rate of return on the portfolio in Normal Economy

The rate of return on the portfolio in Boom

b. Expected Portfolio Return = (0.20*0.026) + (0.60*0.122) + (0.20*0.166) = 0.1116 or 11.16%

c. The investment opportunities have these characteristics:Mean ReturnStandard Deviation

Stocks 13.00% 9.80%

Bonds 8.40% 3.20%

Portfolio (Bonds + Stocks)11.16% 4.61%

The best choice depends on the degree of investors aversion to risk. Here we can see the if stocks are taken separately the standard deviation (9.80%) is much higher with higher return (9.80%) and bonds with lower standard deviation (3.20%) with lower return (8.40%). Considering the risk and return I will chose portfolio over stocks and bonds because it changes the rate of return return at a very small amount but significantly reduces the risk provides the maximum return for a minimum risk.