Assume that you recently graduated and landed a job as a financial planner with Cicero Services, an investment advisory company. Your first client recently inherited some assets and has asked you to evaluate them. The client owns a bond portfolio with $$1$ million invested in zero coupon Treasury bonds that mature in $10$ years. $**$ The client also has $$2$ million invested in the stock of Blandy, Inc., a company that produces meat$-$and$-$potatoes frozen dinners. Blandy's slogan is$,$ "Solid food for shaky times."

Unfortunately, Congress and the president are engaged in an acrimonious dispute over the budget and the debt ceiling. The outcome of the dispute, which will not be resolved until the end of the year, will have a big impact on interest rates one year from now. Your first task is to determine the risk of the client's bond portfolio. After consulting with the economists at your firm, you have specified five possible scenarios for the resolution of the dispute at the end of the year. For each scenario, you have estimated the probability of the scenario occurring and the impact on interest rates and bond prices if the scenario occurs. Given this information, you have calculated the rate of return on $10$year zero coupon Treasury bonds for each scenario. The probabilities and returns are shown here:

Explain correlation to your client. Calculate the estimated correlation between Blandy and Gourmange. Does this explain why the portfolio standard deviation was less than Blandy's standard deviation?

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$\backslash$table$[[$Scenario$,\backslash$table$[[$Probability of$],[$Scenario$]],\backslash$table$[[$Coupon Treasury Bond$],[$During the Next Year$]]],[$Worst Case,$0\mathrm{.}10,-14\%$e the scenario data to calculate the expected rate of return for the $10$ year zero coupon Treasury bonds during the next year.