Question

Based on the following information:

  

State of   Economy	Probability of State of Economy	Return on Stock J	Return on Stock K
Bear	.22	−.012	.042
Normal	.57	.146	.070
Bull	.21	.226	.100

  

Calculate the expected return for each of the stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected return
Stock J	%
Stock K	%

Calculate the standard deviation for each of the stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

  

Standard deviation
Stock J	%
Stock K	%

What is the covariance between the returns of the two stocks? (Do not round intermediate calculations and round your answer to 6 decimal places, e.g., 32.161616.)

  

Covariance

  

What is the correlation between the returns of the two stocks? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Correlation

Answer 1

Stock I Return (7) Prob. (x-> (x-2)² Prob. (X-X) 2 1-1.2 0.22 -14.004 196-1120 43-14464 14.6 0.57 1.796 3.225616 1.838601 22.6 0.21 9796 95.961616 20.1519 65.13514 X = {cx. Prob.) I (Expected Return) of stock I X = 61.2 X022) + (14.6X0.57)+(22-6X0.21) = 12.8044 or 12.80 Stondoad deviation of stock I og = JzLx-x}.locb. - 65.13514 (8.07%

Słoek k 4.2 Retumly) (7) Probab. (y-7) 4-9 feok (y-7² 0.22 2814 7.9186 1.7421 0.57 -0.014 0.000196 0.00011 0.21 2.99 8. guo1 1.87244 3-61963) tehochod Retuthigh 10 Schected Retusn = {ly. Prob.) of stock K = (4.2 X0-22) + (7X0.57.) +(10X0-21) = 0.924 + 3.99+ 2.1 - 7.0 14 or 4.017 Std. deviation - 3261963) of stock K - 2.9020) 1.927 21.907

(a) Expected Return Stock I = 12.807. K - 7.01% (6) Std. deviation stock I = 8.077. k = 1-90% covariance I (X-7) (y-7) Bob. (X-X)(y-yxBoch • 14.004 - 1.796 9.796 -2.814 -0.014 2.99 0.22 0.57 0.21 8.66959 -0.01433208 6.1509084 14.806166 covariance = E(X-X). Ly.g. Prob. = 14.806166

crselation coulx ). 6xby 14.806166 307 X 1.90 Correlation 0.965640 0.9656 / Correldion blo Stock I&K