Question

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 economy is equally likely to happen.

  

Calculate the expected return of each of the following stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

  

Expected return
Stock A	%
Stock B	%

  

Calculate the standard deviation of each of the following stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

  

Standard deviation
Stock A	%
Stock B	%

  

What is the covariance between the returns of the two stocks? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 6 decimal places, e.g., 32.161616.)

  

Covariance

  

What is the correlation between the returns of the two stocks? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

  

Correlation

Answer 1

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