Question

The return on the Rush Corporation in the state of recession is estimated to be -24% and the return on Rush in the state of boom is estimated to be 30%. The return on the Oberman Corporation in the state of recession is estimated to be 44% and the return on Oberman in the state of boom is estimated to be -17%. Given this information, what is the covariance between Rush and Oberman if there is a 0.60 probability that the economy will be in the state of boom and a 0.40 probability that the economy will be in the state of recession.

Answer 1

Solution :

The covariance between Rush Corporation and Oberman Corporation is = - 790.5600

Please find the attached screenshots of the excel sheet containing the detailed calculation for the solution.

12.01.2020 - Microsoft Excel ? - HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW A B E F G Scenario Expected Return and Variance of the Stock of Rush Corporation Return % Expected Return % Deviation % =D (D.)? Variance = p * (DA) Probability (p) (2) (1) (3) in -24.00 (4) = (2) * (3) -9.60 18.00 { = 8.40% Recession Boom (5) = (3) -2 (4) (6) = (5) ? -32.40 1049.7600 21.60 466.5600 (p* (DA)) = (0A)? = Expected Return of Rush Corporation = 8.40 % Variance of the Rush Corporation = (0A)? = 699.8400 (7) = (2) * (6) 419.9040 279.9360 699.8400 0.60 30.00 Scenario Expected Return and Variance of the Stock of Oberman Corporation Probability Return % Expected Return % Deviation % = D (D)? Variance = p * (De)? (1) (2) 0.40 0.60 44.00 (4) = (2) * (3) 17.60 - 10.20 Expected Return of Oberman Corporation = 7.40 % Variance of Oberman Corporation = (03) = 893.0400 Recession Boom 36.60 (5) = (3) -2 (4) (6) = (5) ? 1339.5600 -24.40 595.3600 (p* (De)2) = (0)2 = (7) = (2) * (6) 535.8240 357.2160 -17.00 = 7.40% 893.0400

12.01.2020 - Microsoft Excel KDS FILE HOME A INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW B Scenario (P) Calculation of covariance between the stocks of Rush Corporation and Oberman Corporation Probability Deviation % of Rush Deviation % of Oberman DA* D: Covariance = COVA, B = 3 (p*DA* De) Corporation = DA Corporation= D. (4) (5) = (3) * (4) (6) = (2) * (5) 0.40 -32.40 36.60 -1185.8400 -474.3360 0.60 21.60 -24.40 -527.0400 -316.2240 (p*DA* De) =- 790.5600 (2) (3) Recession Boom Thus Covariance between Rush Corporation and Oberman Corporation = - 790.5600