Hull Consultants, a famous think tank in the Midwest, has provided probability estimates for the four potential economic states for the coming year. The probability of a boom economy is 14%, the probability of a stable growth economy is 17, the probability of a stagnant economy is 45%, and the probability of a recession is 24%. Calculate the variance and the standard deviation of the two investments: stock and corporate 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 Stock Corporate bond Boom 24% 9% Stable Growth 11% 8% Recession -15% 4% (X; – average) variance (X) = ? n – 1 02 standard deviation V variance = Vo? = 0
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