Question

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Consider the following table: Bond Fund Rate of Return Scenario Severe recession Mild recession Normal growth Boom Stock Fund Probability Rate of Return 0.05 -308 0.25 SS-106 0.40 158 0.30 206 a.Calculate the values of mean return and variance for the stock fund. (Do not round Intermediate calculations. Round "Mean return value to 1 decimal place and "Variance" to 2 decimal places.) 1% Mean return Variance b.Calculate the value of the covariance between the stock and bond funds. (Negative value should be indicated by a minus sign. Do not round Intermediate calculations. Round your answer to 2 decimal places.) Covariance < Prev 2 of 22 Next >

Answer 1

a) Mean Return of the stock fund =0.05 *-30%+0.25*-10%+0.40*15%+0.3*20% =8.0%
Variance =0.05*(-30%-8%)^2 + 0.25*(-10%-8%)^2+ 0.40 *(15%-8%)^2+0.3*(20%-8%)^2=0.02

b. Mean return of bond =0.05*-9%+0.25*15%+0.40*8%+0.30*-5% =5%
Covariance
=0.05*(-30%-8%)*(-9%-5%)+0.25*(-10%-8%) *(15%-5%)+0.40*(15%-8%)* (8%-5%)+ 0.3*(20%-8%)*(-5%-5%) = -0.0046