{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Chap6_solution

# Chap6_solution - Suggested Solutions to Selected Problems...

This preview shows pages 1–3. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Suggested Solutions to Selected Problems for Chap 6 Fin 367 Spring 2008 Professor Bing Han Chapter 6: 3. a. The mean return should be equal to the value computed in the spreadsheet. The fund's return is 3% lower in a recession, but 3% higher in a boom. However, the variance of returns should be higher, reflecting the greater dispersion of outcomes in the three scenarios. b. Calculation of mean return and variance for the stock fund: (A) (B) (C) (D) (E) (F) (G) Scenario Probability Rate of Return Col. B × Col. C Deviation from Expected Return Squared Deviation Col. B × Col. G Recession 0.3-14-4.2-24.0 576 172.8 Normal 0.4 13 5.2 3.0 9 3.6 Boom 0.3 30 9.0 20.0 400 120.0 Expected Return = 10.0 Variance = 296.4 Standard Deviation = 17.22 c. Calculation of covariance: (A) (B) (C) (D) (E) (F) Deviation from Mean Return Scenario Probability Stock Fund Bond Fund Col. C × Col. D Col. B × Col. E Recession 0.3-24 10-240.0-72 Normal 0.4 3 0.0 Boom 0.3 20-10-200.0-60 Covariance = -132 Covariance has increased because the stock returns are more extreme in the recession and boom periods. This makes the tendency for stock returns to be poor when bond returns are good (and vice versa) even more dramatic. 6.6....
View Full Document

{[ snackBarMessage ]}

### Page1 / 6

Chap6_solution - Suggested Solutions to Selected Problems...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online