Question

1. You are considering building up an investment portfolio of stocks (S) and/or short term Treasury bills (T). The returns from both sources are judged uncertain, of course, as the following probability table indicates:

T	S
		-10%	0%	10%	20%
	6%	0	0	0.20	0.20
	8%	0	0.10	0.20	0.10
	10%	0.10	0.10	0	0

Are the returns of stock and bond independent?

Answer 1

Yes,the returns of the stocks and bonds are independent as with any investment, past performance is not predictive of future returns. When comparing the return of stocks versus bonds, investors consider risk. Although bonds on average return less than stocks, the fixed-income securities like bonds provide investors with a sense of confidence. Stocks provide an opportunity for significant growth potential in the long term. When comparing asset types, long-term results show the best picture.Bond returns are smaller but more consistent than stock returns.

As shown in the given date the return on treasury bonds are 6%,8%,10% where as returns on stock over.the same period is -10%, 0, 0, 0.10%, comparing both the returns it's shows that treasury Bond has given a consistent returns over the period whereas declined in stock returns. This shows that bonds returns are independent from the stock returns.