Question

hightlight the answer please

Consider the following table: Stock Fund Bond Fund Scenario Probability 0.20 Rate of Return Rate of Return Severe recession -38 -123 Mild recession 0.20 -26.08 73 Normal growth 0.35 3 88 Boom 0.25 468 78 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 1.5% 9.7300%-Squared Variance 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.) 0.0141%-Squared Covariance

Answer 1

a. Mean Return of stock fund= Sum of (All Probability situation* return)=0.2*(-38%)+0.2*(-26%)+0.35*8%+0.25*46%=1.5%

Variance= 0.2*(-38%-1.5%)^2+0.2(-26%-1.5%)^2+0.35*(8%-1.5%)^2+0.25%*(46%-1.5%)^2=4.8304%

b.

C Е Stock Return Bond Return Scenario -38% Severe Recession -12% -26% 7% Mild Recession Normal growth 8% 3% 46% 7% Вoom -COVARIANCE.S(D2:D5,E2:E5) COVARIANCE.S(array1, array2) Covariance LL

C D E Stock Return Bond Return Scenario Severe Recession -38% -12% Mild Recession -26% 7% Normal growth 8% 3% 46% Вoom 7% Covariance 0.02108333

Hence, co-variance of the sample is 0.0210