onsider the following table Stock Fund Rate of Return 40 20

onsider the following table: Stock Fund Rate of Return -40% -20% 25% 30% Bond Fi Rate of Return Severe recession Mild recession Normal growh Boom Probability 0.10 0 20 0 40 0.30 13% 19% 12% 4% .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 2 decimal places.) 11: % 0639 %-squared Mean rehun Vanance b. Calculate the value of the covarianoe between the stock and bond funds. (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) covariance? %-squared References eBook & Resources Worksheet Learming Objective: 06-02 Calculate mean, varianoe and covariance using either historical data or scenario Type here to search ip

Solution

1. Calcualtion of mean return of stock fund -

Mean return of stock fund = (-0.4*0.1)+(-0.2*0.2)+(0.25*0.4)+(0.3*0.3)

= (-0.04)+(-0.04)+0.1+0.09

= 0.11

variance = 0.1*(-0.4-0.11)^2+0.2*(-0.2-0.11)^2+0.4*(0.25-0.11)^2+0.3*(0.3-0.11)^2

= 0.2601*0.1+0.0961*0.2+0.0196*0.4+0.0361*0.3

= 0.02601+0.01922+0.00784+0.01083

= 0.0639

2. co-variance of both fund = prob. * (x - xmean)*(y-ymean)

= 0.1*(-0.4-0.11)*(-0.13-0.046) + 0.2*(-0.2-0.11)*(0.19-0.046)+0.4*(0.25-0.11)*(0.12-0.046)+0.3*(0.3-0.11)*(-0.09-0.046)

= 0.1*(-0.51)*(-0.176) + (-0.31)*(0.144)*0.2 + 0.4*0.14*0.074+0.19*(-0.136)*0.3

= 0.008976+(-0.00893)+(0.004144)+(-0.00775)

= -0.00356

= -0.36 % squared

In case of any doubt/clarification please comment.