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The following table presents the performance of stock and bond funds under various scenarios.

Scenario Probability | Rate of return of bond fund (%) -8 Severe recession Mild recession Normal growth Boom Rate of return o

a. Calculate the expected returns, standard deviations, correlation coefficient of the stock and bond funds.

b. Suppose an investor forms a portfolio with stocks and bonds. Find the investment opportunity set in differing proportions.

Portfolio expected Portfolio standard deviation return Weights in stock fund 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

c. Draw the investment opportunity set.


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Answer #1

407 468 Probability 0.1 0.2 469 470 471 472 Return on stock(Rs) Return on bond (Rb) 35% -8% 10% 13% 15% 30% -5% 6% 0.5 0.1 47Formulas used :-

Exp. Return =SUMPRODUCT($N$469:$N$472,O469:O472)

Standard Deviation=SUMPRODUCT((O477:O480)^2,$N$469:$N$472)^(1/2)

Covariance=SUMPRODUCT(O477:O480,P477:P480,N469:N472)

Correlation=O483/(O481*P481)

Ε I Stock ! 16.00% 7.96% 23 Expected return Standard deviation Covariance correlation Bond 4% 6.35% -0.004764466 -0.9426 24 2

Formulas used:-

Expected Return on Portfolio=(C29*$D$22)+(D29*$E$22)

Volatility on Portfolio=((C29^2*$D$23^2)+(D29^2*$E$23^2)+(2*$D$24*C29*D29))^(1/2)

Expected Return 16.00% 14.00% 12.00% Expected Return 10.00% 8.00% 6.00% Expected Return 4.00% 2.00% 0.00% 0.00% 8.00% 2.00% 4

I hope my efforts will be fruitful to you....?

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