Question

Help Seven Sun Consider the following table: Check my werk Bond Fund Probability 0.10 Scenario Severe recession Mild recession Normal growth Boom Stock Fund Rate of Return -18% -4.01 0.35 0.35 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 %-Squared b. Calculate the value of the covariance between the stock and bond funds. (Negative value should be indicated by a minus sion. Do not round Intermediate calculations. Round your answer to 4 decimal places.) < Prev 3 of 11 !!! Next > search

Answer 1

a

Stock
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Recession	0.1	-18	-1.8	-38.5	0.0148225
Bad	0.2	-4	-0.8	-24.5	0.012005
Normal	0.35	23	8.05	2.5	0.00021875
Boom	0.35	43	15.05	22.5	0.01771875
	Expected return %=	sum of weighted return =	20.5	Sum=Variance Stock=	0.0448
			Standard deviation of Stock%	=(Variance)^(1/2)	21.16

b

Bond
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Recession	0.1	-8	-0.8	-14.15	0.002002225
Bad	0.2	12	2.4	5.85	0.00068445
Normal	0.35	10	3.5	3.85	0.000518788
Boom	0.35	3	1.05	-3.15	0.000347288
	Expected return %=	sum of weighted return =	6.15	Sum=Variance Bond=	0.00355
			Standard deviation of Bond%	=(Variance)^(1/2)	5.96
Covariance Stock Bond:
Scenario	Probability	Actual return% -expected return% for A(A)	Actual return% -expected return% For B(B)	(A)*(B)*probability
Recession	0.1	-38.5	-14.15	0.00544775
Bad	0.2	-24.5	5.85	-0.0028665
Normal	0.35	2.5	3.85	0.000336875
Boom	0.35	22.5	-3.15	-0.002480625
			Covariance=sum=	0.0005