Question: 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 as

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 as follows: severe recession: .10; mild recession: .20; normal growth: .35; boom: .35.

a. Would you expect the mean return and variance of the stock fund to be more than, less than, or equal to the values computed in Spreadsheet 6.2? Why?

b. Calculate the new values of mean return and variance for the stock fund using a format similar to Spreadsheet 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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