Class Assignment 7Name:Group:

You have been provided with the following information for a Stock fund and a Bond fund:

State of Economy

Probability

Return on Stock fund

Return on Bond fund

Recession

20%

-5%

14%

Normal

60%

15%

8%

Boom

20%

25%

4%

Calculations

Stock Fund

Bond Fund

Expected return

13%

8.4%

Standard deviation

9.8%

?

1.Calculate the standard deviation for the Bond fund.(6 min)

2.Calculate the expected return for a portfolio consisting of 40% Stock fund and 60% Bond fund.(4 min)

3.Calculate the covariance and correlation for a portfolio made up of 40% Stock fund and 60% Bond fund. _XY=E(r_X.r_Y) - E(r_X)E(r_Y) (6 min)

4.Calculate the standard deviation for a portfolio made up of 40% Stock fund and 60% Bond fund. (4min)_p² = w_x²_x² +w_Y²_Y² +2w_xw_YXY

5.Explain the results in 1-4 above in terms of what you know about correlation and diversification.

(4 min)