Question 2 (20 marks): Round interim calculations to 6 decimals and final calculations to 4 decimals. You have been provided with the following information for a Stock fund and a Bond fund: Return on Portfolio State of Economy Recession Normal Boom Probability 20% 60% 20% Return on Stock fund -5% 15% 25% Return on Bond fund 14% 8% 4% Calculations Stock Fund Portfolio - 60% Stocks: 40% Bonds 13% 9.8% Bond Fund 8.4% ? I Expected return Standard deviation Covariance Correlation 1. Calculate the standard deviation for the Bond fund. (4 marks) 2. Calculate the expected return for a portfolio consisting of 40% Stock fund and 60% Bond fund. (4 marks) 3. Calculate the covariance and correlation for a portfolio made up of 40% Stock fund and 60% Bond fund. (6 marks) 4. Calculate the standard deviation for a portfolio made up of 40% Stock fund and 60% Bond fund. (4 marks) 5. Explain the results in 1-4 above in terms of what you know about correlation and diversification. (2 marks)