Question

Consider the following table: Stock Fund Bond Fund Scenario Probability Rate of Return Rate of Return Severe recession 0.05 −28% −13% Mild recession 0.25 −8% 19% Normal growth 0.40 13% 12% Boom 0.30 18% −9% 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 2 decimal places.) Expert Answer Anonymous answered this Was this answer helpful? 0 0 7,656 answers Answer a. Stock Fund: Mean Return = 0.05 * (-0.28) + 0.25 * (-0.08) + 0.40 * 0.13 + 0.30 * 0.18 Mean Return = 0.072 or 7.2% Variance = 0.05 * (-0.28 - 0.072)^2 + 0.25 * (-0.08 - 0.072)^2 + 0.40 * (0.13 - 0.072)^2 + 0.3 * (0.18 - 0.072)^2 Variance = 0.02

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 2 decimal places.)

Covariance       %-Squared

Answer 1