Question
16. Investing: Stocks and Bonds Do bonds reduce the overall risk of an investment portfolio? Let & be a random variable representing annual percent
16. Investing: Stocks and Bonds Do bonds reduce the overall risk of an investment portfolio? Let & be a random variable representing annual percent return for Vanguard Total Stock Index (all stocks). Let y be a random variable representing annual return for Vanguard Balanced Index ( 60% stock and 40% bond). For the past several years, we have the following data (Reference: Morningstar Research Group, Chicago). I: 11 0 36 21 31 23 24 -11 -11 -21 y: 10 -2 29 14 22 18 14 -2 -3 -10 a. Compute , , y, and Ey b. Use the results of part (a) to compute the sample mean, variance, and standard deviation for x and for y c. Compute a 75% Chebyshev interval around the mean for x values and also for y values. Use the intervals to compare the two funds. d. Interpretation: Compute the coefficient of variation for each fund. Use the coefficients of variation to compare the two funds. If s represents risks and represents expected return, then s/ can be thought of as a measure of risk per unit of expected return. In this case, why is a smaller CV better? Explain.
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