You are given the following information: State of Economy Return on Stock A Return on Stock B Bear .119 ?.062 Normal .098 .165 Bull .090 .250 Assume each state of the...

3.9 Ratings (498 Votes)

Stock A
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Bear	0.3333	11.9	3.96627	1.66769	9.26971E-05
Normal	0.3333	9.8	3.26634	-0.43231	6.22911E-06
Bull	0.3333	9	2.9997	-1.23231	5.06145E-05

	Expected return %=	sum of weighted return =	10.23	Sum=Variance Stock A=	0.00015
			Standard deviation of Stock A%	=(Variance)^(1/2)	1.22

Stock B
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Bear	0.3333	-6.2	-2.06646	-17.96549	0.010757552
Normal	0.3333	16.5	5.49945	4.73451	0.000747111
Bull	0.3333	25	8.3325	13.23451	0.005837825

	Expected return %=	sum of weighted return =	11.77	Sum=Variance Stock B=	0.01734
			Standard deviation of Stock B%	=(Variance)^(1/2)	13.17

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	1.66769	-17.96549	-0.000998596
Normal	0.3333	-0.43231	4.73451	-6.8219E-05
Bull	0.3333	-1.23231	13.23451	-0.00054358

			Covariance=sum=	-0.001610
		Correlation A&B=	Covariance/(std devA*std devB)=	-0.1

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