#1 Capital market expectations for stock and bond funds
Use the given rates of return under different market conditions to calculate the expected or mean return for the stock and bond fund.
		Stock Fund		Bond Fund
Scenario	Probability	Rate of Return	Col B x Col C	Rate of Return	Col B x Col E
Severe recession	0.05	-33		-9
Mild recession	0.25	-9		15
Normal growth	0.40	12		8
Boom	0.30	31		-5
Expected or Mean Return:		SUM:	0.0	SUM:	0.0
#2 Variance of returns
Use the expected return you calculated in the previous problem to find the deviation from the expected return and calculate the variance of returns for the stock and bond funds.
			Stock Fund			Bond Fund
			Deviation				Deviation
		Rate	from	Variance	Column B	Rate	from	Variance	Column B
		of	Expected	(Squared	x	of	Expected	(Squared	x
Scenario	Prob.	Return	Return	Deviation)	Column E	Return	Return	Deviation)	Column I
Severe recession	0.05	-33		0	0.00	-9		0	0.00
Mild recession	0.25	-9		0	0.00	15		0	0.00
Normal growth	0.40	12		0	0.00	8		0	0.00
Boom	0.30	31		0	0.00	-5		0	0.00
				Variance = SUM	0.00			Variance:	0.00
				Standard deviation = SQRT(Variance)	0.00			Std. Dev.:	0.00
#3 Performance of a portfolio invested in the stock and bond funds
Find the expected return and standard deviation of a portfolio invested 40% in the stock fund and 60% in the bond fund by weighting the returns by the amount invested under each economic scenario.
		Portfolio invested 40% in stock fund and 60% in bond fund
		Rate	Column B	Deviation from		Column B
		of	x	Expected	Squared	x
Scenario	Probability	Return	Column C	Return	Deviation	Column F
Severe recession	0.05		0.00	0.0	0.00	0.00
Mild recession	0.25		0.00	0.0	0.00	0.00
Normal growth	0.40		0.00	0.0	0.00	0.00
Boom	0.30		0.00	0.0	0.00	0.00
		Expected return:	0.00		Variance:	0.00
					Standard deviation:	0.00
#4 Covariance between the returns of the stock and bond funds
Use the deviation from return that you calculated in #2 above to calculate the covariance and correlation coefficient of the stock and bond funds.
		Deviation from Mean Return		Covariance
Scenario	Probability	Stock Fund	Bond Fund	Product of Dev	Col B x Col E
Severe recession	0.05		-14	0	0.0
Mild recession	0.25		10	0	0.0
Normal growth	0.40		3	0	0.0
Boom	0.30		-10	0	0.0
			Covariance =	SUM:	0.0
Correlation coefficient = Covariance/(StdDev(stocks)*StdDev(bonds)) =					#DIV/0!
#5 What does the correlation coefficient you calculate indicate?
#6 What is the Sharpe ratio and how does diversification improve it?