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             %-Squared

Stock Fund Bond Fund Scenario Probability Rate of Return Rate of Return Severe recession 0.10 39% 8% Mild recession 0.20 19% 8% Normal growth 0.35 16% 5% Boom 0.35 30% 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

Explanation / Answer

Stock Fund Mean=0.1*(-39%)+0.2*(-19%)+0.35*16%+0.35*30%=8.4%

Stock FUnd Variance=0.1*(-39%-8.4%)^2+0.2*(-19%-8.4%)^2+0.35*(16%-8.4%)^2+0.35*(30%-8.4%)^2=558.34%%

Bond Fund Mean=0.1*(-8%)+0.2*8%+0.35*5%+0.35*(-5%)=0.8%

Covariance=0.1*(-39%-8.4%)*(-8%-0.8%)+0.2*(-19%-8.4%)*(8%-0.8%)+0.35*(16%-8.4%)*(5%-0.8%)+0.35*(30%-8.4%)*(-5%-0.8%)=-30.42%%

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