Question

Consider the following table:

		Stock Fund	Bond Fund
Scenario	Probability	Rate of Return	Rate of Return
Severe recession	0.10	−42%	−15%
Mild recession	0.15	−18.0%	7%
Normal growth	0.35	20%	9%
Boom	0.40	45%	−6%

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

For a I got the right mean (18.1) but the variance I got keeps saying its incorrect (.084739). Someone please help me out(:

Answer 1

Mean return for stock fund=0.10*(-42%)+0.15*(-18%)+0.35*(20%)+0.40*(45%)=18.100%

Variance for stock fund=0.10*(-42%-18.100%)^2+0.15*(-18%-18.100%)^2+0.35*(20%-18.100%)^2+0.40*(45%-18.100%)^2=847.39 %Squared

Mean return for bond fund=0.10*(-15%)+0.15*(7%)+0.35*(9%)+0.40*(-6%)=0.300%

Covariance=0.10*(-42%-18.100%)*(-15%-0.3%)+0.15*(-18%-18.100%)*(7%-0.3%)+0.35*(20%-18.100%)*(9%-0.3%)+0.40*(45%-18.100%)*(-6%-0.3%)=-6.33 % Squared