# Question

Assume that there are four equally likely states of the economy: boom, low growth, recession, and depression. Also, assume that the percentage annual return you obtain when you invest a dollar in gold or the stock market is shown in the file S04_65.xlsx.

a. Find the covariance and correlation between the annual return on the market and the annual return on gold. Interpret your answers.

b. Suppose you invest 40% of your available money in the market and 60% of your money in gold. Determine the mean and standard deviation of the annual return on your portfolio.

c. Obtain your part b answer by determining the actual return on your portfolio in each state of the economy and then finding the mean and variance directly, without using any formulas involving co variances or correlations.

d. Suppose you invested 70% of your money in the market and 30% in gold. Without doing any calculations, determine whether the mean and standard deviation of your portfolio would increase or decrease from your answer in part b. Give an intuitive explanation to support your answers.

a. Find the covariance and correlation between the annual return on the market and the annual return on gold. Interpret your answers.

b. Suppose you invest 40% of your available money in the market and 60% of your money in gold. Determine the mean and standard deviation of the annual return on your portfolio.

c. Obtain your part b answer by determining the actual return on your portfolio in each state of the economy and then finding the mean and variance directly, without using any formulas involving co variances or correlations.

d. Suppose you invested 70% of your money in the market and 30% in gold. Without doing any calculations, determine whether the mean and standard deviation of your portfolio would increase or decrease from your answer in part b. Give an intuitive explanation to support your answers.

## Answer to relevant Questions

Suppose there are three states of the economy: boom, moderate growth, and recession. The annual return on Honda and Toyota stock in each state of the economy is shown in the file S04_66.xlsx.a. Calculate the mean and ...Equation (4.7) for variance indicates exactly what variance is: the weighted average of squared deviations from the mean, weighted by the probabilities. However, the computing formula for variance, Equation (4.9), is more ...A manufacturing plant produces two distinct products, A and B. The cost of producing one unit of A is $18 and that of B is $22. Assume that this plant incurs a weekly setup cost of $24,000 regardless of the number of units ...The results we obtain with conditional probabilities can be quite counterintuitive, even paradoxical. This case is similar to one described in an article by Blyth (1972), and is usually referred to as Simpson’s paradox. ...The amount of a soft drink that goes into a typical 12-ounce can varies from can to can. It is normally distributed with an adjustable mean µ and a fixed standard deviation of 0.05 ounce. a. If regulations require that cans ...Post your question

0