Do you have to be rich to invest in bonds and real estate? No, mutual fund shares are available to you even if you aren't rich. Let x represent annual percentage return (after expenses) on the Vanguard Total Bond Index Fund, and let y represent annual percentage return on the Fidelity Real Estate Investment Fund. Over a long period of time, we have the following population estimates. Hx = 7.34, Ox = 6.55, Hy = 13.15, Oy = 18.55, p z 0.424 (a) Do you think the variables x and y are independent? Explain your answer. o Yes. Interest rate probably affects both investment returns. o No. Interest rates probably has no effect on the investment returns. o No. Interest rate probably affects both investment returns. o Yes. Interest rates probably has no effect on the investment returns. (b) Suppose you decide to put 60% of your investment in bonds and 40% in real estate. This means you will use a weighted average w = 0.6x + 0.4y. Estimate your expected percentage return uw and risk ow. Pw = Ow = (c) Repeat part (b) if w = 0.4x + 0.6y. Hw = Ow = (d) Compare your results in parts (b) and (c). Which investment has the higher expected return? Which has the greater risk as measured by ow? O w = 0.6x + 0.4y produces higher return with greater risk as measured by ow. O w = 0.6x + 0.4y produces higher return with lower risk as measured by ow. o Both investments produce the same return with the same risk as measured by ow- O w = 0.4x + 0.6y produces higher return with lower risk as measured by ow: O w = 0.4x + 0.6y produces higher return with greater risk as measured by ow.

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Do you have to be rich to invest in bonds and real estate? No, mutual fund shares are available to you even if you aren't rich. Let x represent annual percentage return (after expenses) on the Vanguard Total Bond Index Fund, and let y represent annual percentage return on the Fidelity Real Estate
Investment Fund. Over a long period of time, we have the following population estimates.
Hx = 7.34,
Ox = 6.55,
Hy = 13.15,
Oy = 18.55,
p z 0.424
(a) Do you think the variables x and y are independent? Explain your answer.
o Yes. Interest rate probably affects both investment returns.
o No. Interest rates probably has no effect on the investment returns.
o No. Interest rate probably affects both investment returns.
o Yes. Interest rates probably has no effect on the investment returns.
(b) Suppose you decide to put 60% of your investment in bonds and 40% in real estate. This means you will use a weighted average w = 0.6x + 0.4y. Estimate your expected percentage return uw and risk ow.
Pw =
Ow =
(c) Repeat part (b) if w = 0.4x + 0.6y.
Hw =
Ow =
(d) Compare your results in parts (b) and (c). Which investment has the higher expected return? Which has the greater risk as measured by ow?
O w = 0.6x + 0.4y produces higher return with greater risk as measured by ow.
O w = 0.6x + 0.4y produces higher return with lower risk as measured by ow.
o Both investments produce the same return with the same risk as measured by ow-
O w = 0.4x + 0.6y produces higher return with lower risk as measured by ow:
O w = 0.4x + 0.6y produces higher return with greater risk as measured by ow.
Transcribed Image Text:Do you have to be rich to invest in bonds and real estate? No, mutual fund shares are available to you even if you aren't rich. Let x represent annual percentage return (after expenses) on the Vanguard Total Bond Index Fund, and let y represent annual percentage return on the Fidelity Real Estate Investment Fund. Over a long period of time, we have the following population estimates. Hx = 7.34, Ox = 6.55, Hy = 13.15, Oy = 18.55, p z 0.424 (a) Do you think the variables x and y are independent? Explain your answer. o Yes. Interest rate probably affects both investment returns. o No. Interest rates probably has no effect on the investment returns. o No. Interest rate probably affects both investment returns. o Yes. Interest rates probably has no effect on the investment returns. (b) Suppose you decide to put 60% of your investment in bonds and 40% in real estate. This means you will use a weighted average w = 0.6x + 0.4y. Estimate your expected percentage return uw and risk ow. Pw = Ow = (c) Repeat part (b) if w = 0.4x + 0.6y. Hw = Ow = (d) Compare your results in parts (b) and (c). Which investment has the higher expected return? Which has the greater risk as measured by ow? O w = 0.6x + 0.4y produces higher return with greater risk as measured by ow. O w = 0.6x + 0.4y produces higher return with lower risk as measured by ow. o Both investments produce the same return with the same risk as measured by ow- O w = 0.4x + 0.6y produces higher return with lower risk as measured by ow: O w = 0.4x + 0.6y produces higher return with greater risk as measured by ow.
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