Consider the following table: a. Calculate the values of mean return and varianc

Question

Consider the following table:

   

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.)

Covariance            

Stock Fund Bond Fund Scenario Probability Rate of Return Rate of Return Severe recession 0.05 30% 8% Mild recession 0.20 8% 8% Normal growth 0.40 8% 4% Boom 0.35 38% 6%

Explanation / Answer

Expected Return = 0.05 * (-30%) + 0.20 * (-8%) + 0.40 * (8%) + 0.35 * (38%)

Expected Return = -1.5% - 1.6% + 3.2% + 13.3%

Expected Return = 13.4%

Variance = 0.05 * (-30% - 13.4%)2 + 0.20 * (-8% - 13.4%)2 + 0.40 * (8% - 13.4%)2 + 0.35 * (38% - 13.4%)2

Variance = 4.0924

Part B:

Expected Return of Bond = 0.05 * (-8%) + 0.20 * (8%) + 0.40 * (4%) + 0.35 * (6%)

Expected Return = -0.40% + 1.6% + 1.6% + 2.10%

Expected Return = 4.90%

Covariance = 0.05 * (-30% - 13.4%) * (-8% - 4.90%) + 0.20 * (-8% - 13.4%) * (8% - 4.90%) + 0.40 * (8% - 13.4%) * (4% - 4.90%) + 0.35 * (38% - 13.4%) * (6%% - 4.90%)

Covariance = 0.0026

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