Question

PROBLEM 4. Covariance and Correlation Based on the following information, calculate the expected return and standard deviation of each of the following stocks. Assume each state of the economy is equally likely to happen. What are the covariance and correlation between the returns of the two stocks? State of Economy Return on Stock A Return on Stock B Bear . 108 -.067 Normal .126 .113 Bull .064 .276

Answer 1

[Stock A State of Return (x) (x-x) (x-7) ² Economy 10-84. 0087 Bear 2.67 037.569 761289 12.4609 12.67 Normal -3.53 6.4% Bull 20. 34677 => DeleteR$ 607822 Expected retwin => 290877 993 Standard deviation = GÆS SAHAJAB 16.7802 BAEPE 960% Scanned with CamScanner

Stock B y- economy ý (y-7 return State of economy Bear Normal Bull Expected cy) get wrin cy -607% 10 3% 27.6% -17043 0. 5 4 30308049 003249 16087 284.5969 - ER, =) 32.2 -> 10.73% 588072677 =) 196.2493 cŷ J CS Scanned subtl2 ; 6 B => 1196.2922 =).14% CamScanner

COVAB (x-7) CY-V) =) 0.0087 X - 001743 z) - 0.0015 =) 0.0 267 X 0.0057 => 0.0002 =) - 0.0060 =)-0.0 353 X 0.1687 -0.0073] =) -0.00 24 . - Covariance -0.0004 Correlation CRA , RB) = (0.0260 XO.141-standard deviation. =) -0.0024 0.00364 E) 0.6593 Scanned with CamScanner