Covariance and Correlation Based on the following information, calculate the expected return and standard deviation of...

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Finance

Covariance and Correlation Based on the following information,calculate the expected return and standard deviation of each of thefollowing stocks. Assume each state of the economy is equallylikely to happen. What are the covariance and correlation betweenthe returns of the two stocks?
STATE OF ECONOMY
RETURN ON STOCK A
RETURN ON STOCK B
Bear
Normal
Bull
-.032
.124
.193
-.103
-.025
.469

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4.2 Ratings (664 Votes)

Stock A
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Bear	0.3333	-3.2	-1.06656	-12.69905	0.005374991
Normal	0.3333	12.4	4.13292	2.90095	0.000280489
Bull	0.3333	19.3	6.43269	9.80095	0.003201634

	Expected return %=	sum of weighted return =	9.5	Sum=Variance Stock A=	0.00886
			Standard deviation of Stock A%	=(Variance)^(1/2)	9.41

Stock B
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Bear	0.3333	-10.3	-3.43299	-7.596937	0.001923589
Normal	0.3333	-2.5	-0.83325	0.203063	1.37435E-06
Bull	0.3333	4.69	1.563177	7.393063	0.00182173

	Expected return %=	sum of weighted return =	-2.7	Sum=Variance Stock B=	0.00375
			Standard deviation of Stock B%	=(Variance)^(1/2)	6.12

Covariance Stock A Stock B:
Scenario	Probability	Actual return% -expected return% for A(A)	Actual return% -expected return% For B(B)	(A)(B)probability
Bear	0.3333	-12.69905	-7.596937	0.003215475
Normal	0.3333	2.90095	0.203063	1.96339E-05
Bull	0.3333	9.80095	7.393063	0.00241506

			Covariance=sum=	0.005650168
		Correlation A&B=	*Covariance/(std devAstd devB)=**	0.980824107

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Transcribed Image Text

Covariance and Correlation Based on the following information,calculate the expected return and standard deviation of each of thefollowing stocks. Assume each state of the economy is equallylikely to happen. What are the covariance and correlation betweenthe returns of the two stocks?STATE OF ECONOMYRETURN ON STOCK ARETURN ON STOCK BBearNormalBull-.032.124.193-.103-.025.469