PLEASE SHOW HOW YOU CALCULATE: DEVIATION FROM EXPECTED RETURN, squared deviation

Question

PLEASE SHOW HOW YOU CALCULATE: DEVIATION

FROM EXPECTED RETURN, squared deviation, and

Bond fund

Consider the following table:

   

Calculate the values of mean return and variance for the stock fund. (Do not round intermediate calculations. Round "Mean return" value to 2 decimal place and "Variance" to 2 decimal places.)

      

Calculate the value of the covariance between the stock and bond funds. (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

PLEASE SHOW HOW YOU CALCULATE: DEVIATION

FROM EXPECTED RETURN, squared deviation, and

Bond fund

Consider the following table:

Explanation / Answer

Stock fund:

Mean return = 0.05 * -0.27 + 0.25 * -0.07 + 0.40 * 0.12 + 0.30 * 0.17

= -0.0135 + (0.0175) + 0.048 + 0.051

= 0.068 or 6.8%.

Variance = 0.05(-0.27 - 0.068)2 + 0.25(-0.07 - 0.068)2 + 0.40(0.12 - 0.068)2 + 0.30(0.17 - 0.068)2

= 0.0057122 + 0.004761 + 0.0010816 + 0.0031212

= 0.014676

Standard deviation = 0.1211 or 12.11%.

Computation of Covariance

0.0042534

Probability(p) Stock fund return(a) Bond fund return(b) a*p Deviation from expected retun(stock fund) b*p Deviation from expected return
(bond fund) Severe recession 0.05 -0.27 -0.12 -0.0135 0.338 -0.006 0.179 Mild recession 0.25 -0.07 0.18 -0.0175 0.138 0.045 0.121 Normal growth 0.40 0.12 0.11 0.048 0.052 0.044 0.051 Boom 0.30 0.17 -0.08 0.051 0.102 -0.024 0.139 Expected return 0.068 or 6.8% 0.059 or 5.9%

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