Question

The return on the Rush Corporation in the state of recession is estimated to be -25% and the return on Rush in the state of boom is estimated to be 35%. The return on the Oberman Corporation in the state of recession is estimated to be 45% and the return on Oberman in the state of boom is estimated to be -18%. Given this information, what is the covariance between Rush and Oberman if there is a 0.50 probability that the economy will be in the state of boom and a 0.50 probability that the economy will be in the state of recession.

Please give specific calculations, thanks!!!

Answer 1

Rush
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Boom	0.5	35	17.5	30	0.045
Recession	0.5	-25	-12.5	-30	0.045
	Expected return %=	sum of weighted return =	5	Sum=Variance Rush=	0.09
			Standard deviation of Rush%	=(Variance)^(1/2)	30
Oberman
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Boom	0.5	-18	-9	-31.5	0.0496125
Recession	0.5	45	22.5	31.5	0.0496125
	Expected return %=	sum of weighted return =	13.5	Sum=Variance Oberman=	0.09923
			Standard deviation of Oberman%	=(Variance)^(1/2)	31.5
Covariance Rush Oberman:
Scenario	Probability	Actual return% -expected return% for A(A)	Actual return% -expected return% For B(B)	(A)*(B)*probability
Boom	0.5	30	-31.5	-0.04725
Recession	0.5	-30	31.5	-0.04725
			Covariance=sum=	-0.0945