Could someone help me with this problem? Consider the following table Stock Fund
ID: 2811683 • Letter: C
Question
Could someone help me with this problem?
Consider the following table Stock Fund Rate of Returm -34% -18% 14% 24% Bond Fund Rate of Return -10% 6% Scenaric Probability Severe recession Mild recession Normal growth 0.15 0.20 0.35 0.30 7% Boom 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 3.4 % Variance 22.62 096-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 -2476 %-SquaredExplanation / Answer
Mean Return
Scenario
Probability
(A)
Rate of return
(B)
Expected rate of return
C= A*B
Severe recession
0.15
-34%
-5.10%
Mild recession
0.20
-18%
-3.60%
Normal growth
0.35
14%
4.90%
Boom
0.30
24%
7.20%
Mean return
3.40%
Variance
Scenario
Probability
Rate of return
Rate of return-Mean return
Probability*( Rate of return-Mean return)2
Severe recession
0.15
-34%
-37.40
209.814
Mild recession
0.20
-18%
-21.40
91.592
Normal growth
0.35
14%
10.60
39.326
Boom
0.30
24%
20.60
127.308
Variance
468.04
Mean return = 3.40%
Variance = 21.6342% squared = 468.04
For calculating the covariance we have to calculate men return of the bond fund which is as follows:
Mean return = (-10%*.15)+(6%*.20)+(7%*.35)+(-3%*0.30)
= -1.50+1.20+2.45+-0.90
= 1.25%
Covariance table
Scenario
Probability
Stock fund
Rate of return
Bond fund
rate of return
Stock fund
Rate of return-Stock fund mean return
Bond fund Rate of return-Bond fund mean return
(Stock fund
Rate of return-Stock fund mean return)*( Bond fund Rate of return-Bond fund mean return)
Probability*(Stock fund Rate of return-Stock fund mean return)*( Bond fund Rate of return-Bond fund mean return)
1
2
3
4
5
6
7=5*6
8=2*7
Severe recession
0.15
-34%
-10%
-37.40
-11.25
420.75
63.1125
Mild recession
0.20
-18%
6%
-21.40
4.75
-101.65
-20.33
Normal growth
0.35
14%
7%
10.60
5.75
60.95
21.3325
Boom
0.30
24%
-3%
20.60
-4.25
-87.55
-26.265
Covariance
37.85
Covariance = 37.85 or say 6.1522% squared
Scenario
Probability
(A)
Rate of return
(B)
Expected rate of return
C= A*B
Severe recession
0.15
-34%
-5.10%
Mild recession
0.20
-18%
-3.60%
Normal growth
0.35
14%
4.90%
Boom
0.30
24%
7.20%
Mean return
3.40%