Question

Probability   Economic_Condition   Corporate_Bond_Fund   Common_Stock_Fund
0.01   Extreme_recession   -200   -999
0.09   Recession   -40   -300
0.20   Stagnation   20   -50
0.35   Slow_growth   80   50
0.20   Moderate_growth   100   200
0.15   High_growth   110   350

a.Compute the expected return for the corporate bond fund and for the common stock fund.

b.Compute the standard deviation for the corporate bond fund and for the common stock fund.

c.Would you invest in the corporate bond fund or the common stock​ fund? Explain.

Based on the expected​ value, the____fund should be chosen. Since the standard deviation for the common stock fund is___that for the corporate bond​ fund, the common stock fund___the corporate bond fund and an investor__he risk when making a decision.

Answer 1

x	y	f(x,y)	x*f(x,y)	y*f(x,y)	x^2f(x,y)	y^2f(x,y)	xy*f(x,y)
-200	-999	0.01	-2	-9.99	400	9980.01	1998
-40	-300	0.09	-3.6	-27	144	8100	1080
20	-50	0.2	4	-10	80	500	-200
80	50	0.35	28	17.5	2240	875	1400
100	200	0.2	20	40	2000	8000	4000
110	350	0.15	16.5	52.5	1815	18375	5775
	Total	1	62.9	63.01	6679	45830.01	14053
	E(X)=ΣxP(x,y)=					62.9
	E(X2)=Σx2P(x,y)=					6679
	E(Y)=ΣyP(x,y)=					63.01
	E(Y2)=Σy2P(x,y)=					45830.01
	Var(X)=E(X2)-(E(X))2=					2722.59
	Var(Y)=E(Y2)-(E(Y))2=					41859.75

a) expected return for the corporate bond fund =62.9
expected return for the common stock fund =63.01

b) standard deviation for the corporate bond fund =52.1784

standard deviation for the common stock fund =204.5966

c)

Based on the expected​ value, the common stock fund should be chosen. Since the standard deviation for the common stock fund is higher then that for the corporate bond​ fund, the common stock fund is riskier than _the corporate bond fund and an investor lower the risk when making a decision.