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#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
| #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? | |||||||||
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Foundations In Personal Finance
Authors: Dave Ramsey
3rd Edition
1936948524, 978-1936948529
