Question

Consider the following table: Stock Fund Bond Fund Rate of Return Scenario Severe recession Probability Rate of Return 0.10 -43% -12% Mild recession 0.20 -17% 17% 12% Normal growth 0.30 6% 31% Boom 0.40 4% a. Calculate the values of mean return and variance for the stock fund. (Do not round interr Round "Mean return" value to 1 decimal place and "Variance" to 4 decimal places.) 06 Mean return %-Squared Variance b. Calculate the value of the covariance between the stock and bond funds. (Negative value sho a minus sign. Do not round intermediate calculations. Round your answer to 4 decimal places. %-Squared Covariance Next > 31 <Prex

Answer 1

(a (x - Condition Probability (p) p*(x- p*x (x-x) 43.00430 -17.00 3.40 10% -52.80 278.78 Severe recession 2787.84 Mild recession 20% 718.24 143.65 -26.80 17.00 15.55 Normal growth 5.10 30% 7.20 51.84 31.00 12.40 Epx 9.80 179.78 449.44 Boom 40% 21.20 Ep*(x - x = 617.76 Expected Return == 9.80% Variance Ep*(x-)2 617.76 Probability (p) (x-(y-p*(x-*(y-y) Condition 87.648 Severe recession 0.1 -52.8 -16.6 0.2 Mild recession -26.8 7.4 -39.664 Normal growth 0.3 7.2 1.4 3.024 Boom 0.4 21.2 -0.6 -5.088 Ep*(x - x)*(y - 9)= 45.92 So covariance between stock fund and bond fund =Ep*(x -x)*(y - y) = 45.92

Note Stock fund Bond fund Probability (p) Return (x) Condition p*x (х - х) Y p*y 10% 43 -12 -1.20 4.30 Severe recession -52.80 -16.60 2.40 Mild recession 20% -17 -3.40 12 -26.80 7.40 Normal growth 17 5.10 6 1.80 30% 7.20 1.40 12.40 1.60 Boom 40% 31 21.20 4 -0.60 4.60 9.80 y=Epy= -