15.00 points Problem 6-7 Consider the following table: Stock Fund Bond Fund Prob

Question

15.00 points Problem 6-7 Consider the following table: Stock Fund Bond Fund Probability Rate of Return Rate of Return 0.10 Severe recession 32% 10% -10% Mild recession 0.15 6% 10% Normal growth 0.35 22% 0.40 37% Boom 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 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

Explanation / Answer

a) mean return = 17.8

variance =834.4-17.82 =517.56

b) covariance=E(XY)-E(X)E(Y)=203.6-17.8*6.2=93.24

c)correlation coef r=Covar/(stdev(A)*Stdev(B)) =0.0030/(0.1*0.05)=0.60

P(X) X Y Xp(x) X^2P Yp(Y) xyp 0.1 -32 -10 -3.2 102.4 -1 32 0.15 -10 6 -1.5 15 0.9 -9 0.35 22 10 7.7 169.4 3.5 77 0.4 37 7 14.8 547.6 2.8 103.6 Total 17.8 834.4 6.2 203.6

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