ESSEN OF INVESTMENTS CONNECT AC
ESSEN OF INVESTMENTS CONNECT AC
11th Edition
ISBN: 9781266650314
Author: Bodie
Publisher: MCG
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Chapter 6, Problem 7PS

Use the rate-of-return data for the stock and bond funds presented in Spreadsheet 6.1, but now assume that the probability of each scenario is follows: severe recession: .10; mild recession: .20; normal growth: .35; boom: .35. (LO 6-2)
a. Would you expect the variance for the stock fund to be more than, less than, or equal to the values computed in Spreadsheet 6.2? Why?
b. Calculate the new value of variance for the stock fund using a format similar to Sprcadshcet 6.2. Confirm your intuition from part (a).
c. Calculate the new value of the covariance between the stock and bond funds using a format similar to Spreadsheet 6.4. Explain intuitively why the absolute Value of the covariance has changed.

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