Capital Market Expectations Scenario Probability Rate of Return Stock fund Bond fund Severe recession 0.05 -37 -9 Mild recession 0.25 -11 15 4. Normal growth 0.40 14 8 Воom 0.30 30 Using the data above: i. Calculate the expected returns and risks for stock fund and the bond fund ii. Calculate the portfolio expected return and the portfolio risk iii. What is the interrelationship between between the two assets and explain the direction of the relationship and what is the degree of relationship between the two assets?
Capital Market Expectations Scenario Probability Rate of Return Stock fund Bond fund Severe recession 0.05 -37 -9 Mild recession 0.25 -11 15 4. Normal growth 0.40 14 8 Воom 0.30 30 Using the data above: i. Calculate the expected returns and risks for stock fund and the bond fund ii. Calculate the portfolio expected return and the portfolio risk iii. What is the interrelationship between between the two assets and explain the direction of the relationship and what is the degree of relationship between the two assets?
Chapter1: Financial Statements And Business Decisions
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![Capital Market Expectations
Scenario
Probability
Rate of Return
Stock fund
Bond fund
Severe recession
0.05
-37
-9
3.
Mild recession
0.25
-11
15
4
Normal growth
0.40
14
8.
Воom
0.30
30
-5
Using the data above:
i. Calculate the expected returns and risks for stock fund and the bond fund
ii. Calculate the portfolio expected return and the portfolio risk
i. What is the interrelationship between between the two assets and explain the
direction of the relationship and what is the degree of relationship between the two
assets?
Suppose the probability of each scenario changed to Severe recession: 10%, Mild recession;
20%; normal growth: 35% and boom: 35%
i. Would you expect the Expected return and risk for the stock fund to be more, less or
equal to the values above? Why?
ii.
Calculate the new expected return and risk of the Bond fund
Calculate the new covariance between the stock and bond funds? Explain why the
absolute value of the covariance has changes
ii.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F31211817-c6fc-40e1-a7a5-5f5383d5e7ea%2F201bd998-bc82-431d-9405-37e17ee4c068%2F5pnkvpk_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Capital Market Expectations
Scenario
Probability
Rate of Return
Stock fund
Bond fund
Severe recession
0.05
-37
-9
3.
Mild recession
0.25
-11
15
4
Normal growth
0.40
14
8.
Воom
0.30
30
-5
Using the data above:
i. Calculate the expected returns and risks for stock fund and the bond fund
ii. Calculate the portfolio expected return and the portfolio risk
i. What is the interrelationship between between the two assets and explain the
direction of the relationship and what is the degree of relationship between the two
assets?
Suppose the probability of each scenario changed to Severe recession: 10%, Mild recession;
20%; normal growth: 35% and boom: 35%
i. Would you expect the Expected return and risk for the stock fund to be more, less or
equal to the values above? Why?
ii.
Calculate the new expected return and risk of the Bond fund
Calculate the new covariance between the stock and bond funds? Explain why the
absolute value of the covariance has changes
ii.
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