Question

Consider the Following Table:

		Stock Fund	Bond Fund
Scenario	Probability	Rate of Return	Rate of Return
Severe recession	0.05	−36%	−11%
Mild recession	0.20	−12%	13%
Normal growth	0.40	15%	4%
Boom	0.35	32%	5%

1A) Calculate the values of expected return for the stock fund. (Do not round intermediate calculations. Enter your answer as a decimal number round to 3 decimal place.)

1B) Calculate the values of variance for the stock fund. (Do not round intermediate calculations. Enter your answer as a decimal number round to 4 decimal place.)

1C) 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. Enter your answer as a decimal number rounded to 5 decimal places.)

Answer 1

a. Expected return of stock fund = 13%

b. Variance of stock fund = 373%

c. Co- variance between stock fund and bond fund = -1.6 %