Question

Consider the following table:

   

		Stock Fund	Bond Fund
Scenario	Probability	Rate of Return	Rate of Return
Severe recession	0.05	−38%	−8%
Mild recession	0.25	−16%	8%
Normal growth	0.40	18%	5%
Boom	0.30	32%	−5%

   

b.	Calculate the values of expected return and variance for the stock fund. (Do not round intermediate calculations. Enter "Expected return" value as a percentage rounded to 1 decimal place and "Variance" as decimal number rounded to 4 decimal places.)

       

Expected return	%
Variance

c.	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 4 decimal places.)

Covariance

Answer 1

Solution :

b. The values of expected return and variance for the stock fund are as follows :

Expected Return = 10.9 %

Variance = 454.1900

c. The value of the covariance between the stock fund and bond fund = - 51.6900

Please find the attached screenshots of the excel sheet containing the detailed calculation for the solution.