Question

Consider the following table:

		Stock Fund	Bond Fund
Scenario	Probability	Rate of Return	Rate of Return
Severe recession	0.15	−46%	−20%
Mild recession	0.20	−24.0%	20%
Normal growth	0.30	8%	5%
Boom	0.35	44%	−5%

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	%-Squared

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             %-Squared

Answer 1

Solution :

b. The Mean return of the stock fund = 6.1 % ( when rounded off to one decimal place )

The mean return of the Bond Fund = 0.75 %

The variance of the Stock Fund = 1092.1900 %

The variance of the Bond Fund = 155.6875 %

c. The Covariance between the stock and bond funds = - 27.5750 %

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