Question

Consider the following table

		Stock Fund	Bond Fund
Scenario	Probability	Rate of Return	Rate of Return
Severe recession	.08	– 38%	–9
Mild recession	.21	–10%	16
Normal growth	.37	25%	9
Boom	.34	34%	–4

Required:

(a)	Calculate the values of mean return and variance for the stock fund. (Provide your answer in percents for the return [multiply decimal return with 100] and in basis points for variance [multiply variance in decimals with 10,000]. Round your answers to 2 decimal places.)

Mean return
Variance

(b)	Calculate the value of the covariance between the stock and bond funds. (Provide your answer in basis point, i.e. multiply covariance in decimals with 10,000. Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.)

Covariance

Answer 1

Stock Fund is = X   &     Bond Fund = Y
PROBABILITY		X	P(X)	(X-Mean)	P(X-Mean)^2	y	P(Y)	(Y-Mean)	P(Y-Mean)^2	P(X-Mean)(Y-Mean)
0.08		-38	-3.04	-53.67	230.437512	-9	-0.72	-13.61	14.818568	58.435896
0.21		-10	-2.1	-10	138.379269	16	3.36	16	27.243741	-33.6
0.37		25	9.25	25	32.208093	9	3.33	9	7.130677	83.25
0.34		34	11.56	34	114.236226	-4	-1.36	-4	25.204914	-46.24
			15.67		515.2611		4.61		74.3979	61.845896
	Mean Return of stock fund =15.67%
	Variance of stock Fund   = 515.2611(%)
	CO Variance between stock fund and Bond Fund =61.8459