Question 1
1. Using the information in the following table answer questions (a) through (j). Show your work!
		Stock Fund	Bond Fund
Scenario	Probability (Scenario)	Expected Rate of Return	Expected Rate of Return
1. Severe recession	0.1	-35	8
2. Mild recession	0.15	-10	10
3. Zero growth	0.1	2	10
4. Weak growth	0.2	6	9
5. Normal growth	0.25	20	6
6. Boom	0.2	40	-12
Stock Fund Weight		80%
Bond Fund Weight			20%
	1
a. What is the expected return on this Stock Fund?	9.40	=SUMPRODUCT(B5:B10,C5:C10)
b. What is the expected return on this Bond Fund?	4.20	=SUMPRODUCT(B5:B10,D5:D10)
c. What is the standard deviation of the Stock Fund?	21.834	=SQRT(F18)	476.74	=SUMPRODUCT(B5:B10,(C5:C10-D14)^2)
d. What is the standard deviation of the Bond Fund?	8.232	=SQRT(F21)	67.76	=SUMPRODUCT(B5:B10,(D5:D10-D16)^2)
e. What is the correlation of the Stock and Bond Funds returns?
Now assume that 80% of your investment is allocated to the Stock Fund and 20% is allocated to the Bond Fund. Calculate the following:
f. What is the expected return on the 80% Stock /20% Bond Fund?
g. What is the standard deviation of a 80% Stock Fund / 20% Bond Fund portfolio?
h. What do you expect to happen to the overall risk of a two-asset portfolio as the correlation between the rate of return of the two-assets decreases, i.e. become less positive or more negative? Why?
i. If you allocate a larger proportion of your assets to the Bond Fund and a lesser proportion to the Stock Fund, then what do you expect to happen to the risk of your portfolio position?
j. Assuming the risk-free interest rate is equal to 3.00%, which of the two funds (Stock or Bond) has the higher Sharpe Ratio?