Below are data on economic condition, probability, and expected return on stock and bond funds in a year. Scenario Probability Stock Fund (%) Bond Fund (%) Severe recession 0.05 -37 -10 Mild recession 0.25 -11 10 Normal growth 0.40 14 7 Boom 0.30 30 2 Calculate expected return and standard deviation of each fund. Calculate covariance and correlation coefficient between stock fund and bond fund.
Contingency Table
A contingency table can be defined as the visual representation of the relationship between two or more categorical variables that can be evaluated and registered. It is a categorical version of the scatterplot, which is used to investigate the linear relationship between two variables. A contingency table is indeed a type of frequency distribution table that displays two variables at the same time.
Binomial Distribution
Binomial is an algebraic expression of the sum or the difference of two terms. Before knowing about binomial distribution, we must know about the binomial theorem.
- Below are data on economic condition, probability, and expected return on stock and bond funds in a year.
|
Scenario |
Probability |
Stock Fund (%) |
Bond Fund (%) |
|
Severe recession |
0.05 |
-37 |
-10 |
|
Mild recession |
0.25 |
-11 |
10 |
|
Normal growth |
0.40 |
14 |
7 |
|
Boom |
0.30 |
30 |
2 |
- Calculate expected return and standard deviation of each fund.
- Calculate
covariance andcorrelation coefficient between stock fund and bond fund. - Your portfolio is composed of 85% in bond fund and 15% in stock fund. Using Excel, calculate expected return and standard deviation of your portfolio based on Equations in the attached images.
- Discuss important implications with respect to portfolio theory as you evaluate all numbers in part a, b, and c above.
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