Consider the following table Stock Fund Bond Fund Scenario Probability Rate of R

Question

Consider the following table

Stock Fund Bond Fund

Scenario               Probability          Rate of Return       Rate of Return

Severe recession           0.10 ?30%                     ?11%        

Mild recession                0.15 ?12%                     8%        

Normal growth 0.35 6%                        2%        

Boom 0.40 39% 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.)

  

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.)

  

Explanation / Answer

Calculation:

226.35

A.

StockFund"MeanReturn"=22.5%Answer

StockFundVariance=226.35%squareAnswer

B.

Covariance between the Stock and Bond Funds = 17.1 Answer

Scenario Probability (P) Stock (x) Mean of Stock Fund ( PX) Variance of Stock ( p ( x-x )(x-x ) Severe Recession 0.1 30 3 5.625 Mild Recession 0.15 12 1.8 16.5375 Normal Growth 0.35 6 2.1 95.2875 Boom 0.4 39 15.6 108.9


22.5

226.35

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