Question

Consider the following table: Bond Fund Rate of Return Scenario Severe recession Mild recession Normal growth Boom -80 Stock Fund Rate of Return -390 -19.00 168 Probability 0.10 0.20 0.35 0.35 50 300 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 4 decimal places.) Mean return Variance X-Squared 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 4 decimal places.) Covariance %-Squared

Answer 1

a) Mean Return of the stock fund =0.1*-39%+0.2*-19%+0.35*16%+0.35*30% =8.40%

Variance =0.1*(-39%-8.4%)^2+0.2*(-19%-8.4%)^2+0.35*(16%-8.4%)^2+0.35*(30%-8.4%)^2=5.5834% or 558.34% Squared

b.Mean return of bond =0.1*-8%+0.2*8%+0.35*5%+0.35*-5% =0.8%
Covariance ==0.1*(-39%-8.4%)*(-8%-0.8%)+0.2*(-19%-8.4%)*(8%-0.8%)+0.35*(16%-8.4%)*(5%-0.8%)+0.35*(30%-8.4%)*(-5%-0.8%) =-0.003042% or -30.4200%