Question

Multiple Choice Question 78 Your answer is correct. Given the distributions of returns for the following two stocks, celculate the covariance of the returns for the two stocks. Assume the expected return is 10.8 percent for Stock 1 nd 9.7 percent for Stock 2 Stock 2 0.11 0.08 0.13 Prob Stock 1 0.40.09 0.11 0.17 0.5 0.1 0.000094 0.000321 0.717507 0.000516 Click if you would like to Show Work for this question: Open Show

Answer 1

Stock 1
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
1	0.4	9	3.6	-1.8	0.0001296
2	0.5	11	5.5	0.2	2E-06
3	0.1	17	1.7	6.2	0.0003844
	Expected return %=	sum of weighted return =	10.8	Sum=Variance Stock 1=	0.00052
			Standard deviation of Stock 1%	=(Variance)^(1/2)	2.27
			Coefficient of variation=	Std. dev./return=	0.2102
Stock 2
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
1	0.4	11	4.4	1.3	6.76E-05
2	0.5	8	4	-1.7	0.0001445
3	0.1	13	1.3	3.3	0.0001089
	Expected return %=	sum of weighted return =	9.7	Sum=Variance Stock 2=	0.00032
			Standard deviation of Stock 2%	=(Variance)^(1/2)	1.79
			Coefficient of variation=	Std. dev./return=	0.1845
Covariance Stock 1 Stock 2:
Scenario	Probability	Actual return% -expected return% for A(A)	Actual return% -expected return% For B(B)	(A)*(B)*probability
1	0.4	-1.8	1.3	-0.0000936
2	0.5	0.2	-1.7	-0.000017
3	0.1	6.2	3.3	0.0002046
			Covariance=sum=	0.000094