Question

Consider the following table:

		Stock Fund	Bond Fund
Scenario	Probability	Rate of Return	Rate of Return
Severe recession	0.10	−32%	−17%
Mild recession	0.15	−22%	15%
Normal growth	0.35	14%	6%
Boom	0.40	35%	4%

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

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            

Answer 1

Mean return = Sum of (Rate of returns * probabilities)

Then calculate deviation of those rate of returns from mean return. The next step is to square those returns and multiply them by their respective probabilities and then add the sum of all to get the variance of stock fund.

Same process has to be followed for the bond fund.

To calculate the co-variance, we multiply the individual deviations of stock fund and bond fund with each other and then multiply with the respective probability and the sum of all those values is the Co-variance of stock fund and bond fund.

An excel screenshot has been attached with all the calcualtions.