Question
Class Assignment 7 Name: Group: You have been provided with the following information for a Stock fund and a Bond fund: State of Economy Probability
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(rX.rY) - E(rX)E(rY) (6 min)
4.Calculate the standard deviation for a portfolio made up of 40% Stock fund and 60% Bond fund. (4min)p2 = wx2x2 +wY2Y2 +2wxwYXY
5.Explain the results in 1-4 above in terms of what you know about correlation and diversification.
(4 min)
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