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Assume that the % expected return for security A and the market M for a good,...

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Assume that the % expected return for security A and the marketM for a good, normal and bad economy (probabilities .3,.4,.3) are20, 16, and 10 for A and 8, 4, and 12 for M. Also assume that youinvest 40% in A and 60% in M. Compute the covariance between A andM.

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Stock A
Scenario Probability Return% =rate of return% * probability Actual return -expected return(A)% (A)^2* probability
Good 0.3 20 6 4.6 0.0006348
Normal 0.4 16 6.4 0.6 0.0000144
Bad 0.3 10 3 -5.4 0.0008748
Expected return %= sum of weighted return = 15.4 Sum=Variance Stock A= 0.00152
Standard deviation of Stock A% =(Variance)^(1/2) 3.9
Stock M
Scenario Probability Return% =rate of return% * probability Actual return -expected return(A)% (B)^2* probability
Good 0.3 8 2.4 0.4 4.8E-06
Normal 0.4 4 1.6 -3.6 0.0005184
Bad 0.3 12 3.6 4.4 0.0005808
Expected return %= sum of weighted return = 7.6 Sum=Variance Stock M= 0.0011
Standard deviation of Stock M% =(Variance)^(1/2) 3.32
Covariance Stock A Stock M:
Scenario Probability Actual return% -expected return% for A(A) Actual return% -expected return% For B(B) (A)*(B)*probability
Good 0.3 4.6 0.4 0.0000552
Normal 0.4 0.6 -3.6 -8.64E-05
Bad 0.3 -5.4 4.4 -0.0007128
Covariance=sum= -0.000744

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Assume that the % expected return for security A and the marketM for a good, normal and bad economy (probabilities .3,.4,.3) are20, 16, and 10 for A and 8, 4, and 12 for M. Also assume that youinvest 40% in A and 60% in M. Compute the covariance between A andM.

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