You can only invest in either the stock market

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Suppose that in 2018 the Federal Reserve Bank can take three actions with equal probability: 1) not increasing short-term interest; 2) increasing short-term interest rate moderately; 3) increasing short-term interest rate aggressively. Further assume that the returns on the stock market will be 10%, 8%, and 3% respectively in these three scenarios, and the returns on the bond market will be 4%, 6%, and 8% in these three scenarios. Suppose that you can only invest in either the stock market or the bond market and your goal is to minimize your risk (hint: standard deviation). Will you invest in stocks or bonds?

Reference no: EM131959740

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