Question

Bond FIL 242 Homework #2 Please answer the questions in the space provided below each question. Show all of your work and circle your final answer. 1. You forecast there are three potential scenarios for the economy: a bull, flat, and bear market. You also estimate the returns for a stock and bond mutual fund as follows: Economic Stock Probability Scenario Fund Fund of Scenario Recession - 18% 6% 0.3 Flat 1 8 % 4% 0.45 Boom -8% 0.25 Using this information, you find for the stock fund: E(13)=0.032 and 0 =0.1469, and for the bond fund: E(ru)=0.016 and o=0.0561. A. Compute the covariance between the stock and bond fund. (Record your answer to at least four decimal places) (10 points) B. Compute the correlation coefficient between the stock and bond fund. (Record your answer to at least four decimal places) (10 points) You put 70% of your portfolio in the stock fund and the remaining 30% in the bond fund. C. Compute the standard deviation of your portfolio. (Record your answer to at least four decimal places) (10 points)

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Answer 1

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©v Coax 2 ENG 03:34 25-03-2020 7 X C1259 K L prob (p) 0.30 0.45 0.25 STOCK (A) BOND (B) r- E(r) r- E(r) -0.2120 0.0440 0.0480 0.0240 0.1680 -0.0960 COV(A,B) -0.0027984 0.0005184 -0.004032 COV(A,B)= -0.006312 A B C D 1259 1260 1261 1262 EXPECTED 1263 STATE OF STOCK (A) RETURN (A) r-E(r) p *(r - E(r)^2 STATE OF 1264 ECONOMY prob (p) return (r) px r r - 11 ECONOMY 1265 RECESSION 0.30 -0.18 -0.0540 -0.2120 0.0135 RECESSION 1266 FLAT 0.45 0.08 0.0360 0.0480 0.0010 FLAT 1267 BOOM 0.25 0.20 0.0500 0.1680 0.0071 BOOM 1268 1269 ErA) = 0.0320 variance (A) 0.0216 1270 SD(A) 0.1469 1271 1272 EXPECTED 1273 STATE OF BOND (B) RETURN (B) r-Er p *(r- Er))^2 1274 ECONOMY prob (p) return (r) px r r-4.60 1275 RECESSION 0.30 0.06 0.0180 0.0440 0.0006 A COVARIANCE 1276 FLAT 0.45 0.04 0.0180 0.0240 0.0003 1277 BOOM 0.25 -0.08 -0.0200 -0.0960 0.0023 B CORRELATION 1278 1279 ErB) = 0.0160 variance (B) 0.0031 1280 SD(B) = 0.0561 1281 1282 1202 capm-portfolio retirement futures margin PV, FV, ANNUITY ACC CVP KE BOND HPR REALISED YIELD NPV -0.0063 % -0.7664 [COVARIANCE/(SD(A)*(SD(B))] [-0.006312/(0.1469*0.0561)] RAK ROE std costing EPS%, ECONOMY ... + 1

© v C Ax ENG - 03:35 25-03-2020 29 K L A1294 : x fic А в с 1282 1283 c 1284 1285 WA = 70% =0.70, WB = 30% =0.30 1286 1287 PORTFOLIO VARIANCE = (WA)^2*(SDA)^2 + (WB)^2*(SDB)^2 + 2 WA*WB* COV(A,B) 1288 PORTFOLIO VARIANCE = (0.70)^2*(0.1469)^2 + (0.30)^2*(0.0561)^2 + 2*0.70*0.30*(-0.006312) 1289 PORTFOLIO VARIANCE = 0.00820416 1290 PORTFOLIO SD = SQRT(VARIANCE) 1291 PORTFOLIO SD = 0.0906 1292 1293 1294 1295 1296 1297 1298 1299 1300 1301 1302 1303 1304 1305 1200 capm-portfolio retirement futures margin PV, FV, ANNUITY ACC CVP KE BOND HPR REALISED YIELD NPV RAK ROE std costing EPS%, ECONOMY ... Đ : ►