Question

You are given the following information: State of Economy Return on Stock A Return on Stock B Bear 0.103 -0.046 Normal 0.114 0.149 Bull 0.074 0.234 Assume each state of the economy is equally likely to happen. a. Calculate the expected return of each stock. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation of each stock. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c. 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., .161616.) d. 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., .1616.)

Answer 1

Please see the table below. Cells colored in yellow are your answers. In the snapshot below, I have shown the excel formula used in each cell to get the value.

State	Probability	Ra	Rb
	Pi			Pi x (Ra - 0.097)^2	Pi x (Rb - 0.112)^2	Pi x (Ra - 0.097) x (Rb - 0.112)
Bear	0.333333333	0.103	-0.046	0.000012	0.008356481	-0.000316667
Normal	0.333333333	0.114	0.149	0.000096	0.000448148	0.000207778
Bull	0.333333333	0.074	0.234	0.000176	0.004934259	-0.000932778
Prt (a) Expected return		9.70%	11.23%
Variance				0.000285	0.013739
Part (b) Std dev				1.69%	11.72%
Part (C ) Covariance						(0.001042)
Part (d) Correlation						(0.5267)