Question

Given the returns and probabilities for the three possible states listed below, calculate the covariance between the returns of Stock A and Stock B. For convenience, assume that the expected returns of Stock A and Stock B are 6.20 percent and 10.80 percent, respectively.

Your answer is incorrect. Try again Given the returns and probabilities for the three possible states listed below, calculate the covariance between the returns of Stock A and Stock B. For convenience, assume that the expected returns of Stock A and Stock B are 6.20 percent and 10.80 percent, respectively. (Round answer to 4 decimal places, e.g. 0.0768.) Return on Return on Probability Good OK Poor 0.30 0.42 0.28 Stock A 0.30 0.10 0.25 Stock B 0.50 0.10 0.30 Covariance

Answer 1

Covariance = 0.30 * [(0.3000 - 0.0620) * (0.5000 - 0.1080)] + 0.42 * [(0.1000 - 0.0620) * (0.1000 - 0.1080)] + 0.28 * [(-0.2500 - 0.0620) * (-0.3000 - 0.1080)]
Covariance = 0.30 * 0.093296 + 0.42 * (-0.000304) + 0.28 * 0.127296
Covariance = 0.0635