Question

Consider the following table: Scenario Severe recession Mild recession Normal growth Boom Probability 0.10 0.20 0.40 0.30 Stock Fund Rate of Return -40% -20% 25% 30% Bond Fund Rate of Return -13% 19% 12% -9% 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.) 11.01% 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 e

Answer 1

probability (P) on Mean return a Severe Recession Hild recession Normal Growth Boom 0.2 rah of Return PX Rg PX RB stock fund Bond fund (Rg) (RB) (4.1.) 11-347) (40) (13.1.) (904) (400) 3-84 19.1. 95% 12-1. 10.1 4.864 300% 19.1.) 9.4 (2.741) Mean Return (Rg) = 11/ (Rg3= 4.66 O €51) 961 variance and covariance : Rg- RS RB-RB (Rg - Rs.) 2 (17.6) 2601 €31) 14.4 14 7.4 106 19 (13.6) 361 variance co-variance Px (RS-Rs) (PP-RB) 89.76 189.28) 41.uy (77.52) PXLRG - R3 CRG - Rs.) CRBRB) 260-1 897.6 102.2 Lauga) 78.4 103.68 108.3 (258.0) = 639 (35.6)