Question

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Consider the following table: Scenario Severe recession Mild recession Normal growth Probability 0.15 0.20 0.30 0.35 Stock Fund Rate of Return -46% -22.0% Bond Fund Rate of Return -16% 20% 5% Boom 42% 29 -5% 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 sign. Do not round intermediate calculations. Round your answer to 4 decimal places.) Covariance %-Squared

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

L23 в C D E Scenario Severe recession Mild recession Normal growth Boom Expected return Probability 0.15 0.20 0.30 0.35 Stock Fund -46.0% -22.0% 5.0% 42.0% 4.9% Bond Fund -16.0% 20.0% 2.0% -5.0% 0.5% 10 11 12 a. Stock Fund Mean Variance 4.9% 10.1509% 14 b. Covariance (stock, bond) -0.5031%

Cell reference -

L23 Probability Scenario Severe recession Mild recession Normal growth Boom Expected return 0.15 0.2 0.3 0.35 Stock Fund -0.46 -0.22 0.05 0.42 ESUMPRODUCT(C3:C6,D3:D6) Bond Fund -0.16 0.2 0.02 -0.05 ESUMPRODUCT(C3:C6, E3:E6) 10 11 a. Stock Fund Mean Variance =SUMPRODUCT(C3:C6,D3:06) =SUMPRODUCT|(C10-D3:D6)^2,C3:06) 12 14 b. Covariance (stock, bond) =SUMPRODUCT(D7-D3:06),(E7-E3:E6),C3:06)

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.