Question

Based on the following information: State of Economy Probability of State of Economy Return on Stock J Return on Stock K Bear .24 −.026 .028 Normal .59 .132 .056 Bull .17 .212 .086 a. Calculate the expected return for each of the stocks. (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 for each of the stocks. (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? (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? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., .1616.)

Answer 1

Stock J
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Bear	0.24	-2.6	-0.624	-13.368	0.004288882
Normal	0.59	13.2	7.788	2.432	0.000348963
Bull	0.17	21.2	3.604	10.432	0.001850053
	a. Expected return %=	sum of weighted return =	10.77	Sum=Variance Stock J=	0.00649
			b. Standard deviation of Stock J%	=(Variance)^(1/2)	8.05
Stock K
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Bear	0.24	2.8	0.672	-2.638	0.000167017
Normal	0.59	5.6	3.304	0.162	1.5484E-06
Bull	0.17	8.6	1.462	3.162	0.00016997
	a. Expected return %=	sum of weighted return =	5.44	Sum=Variance Stock K=	0.00034
			b. Standard deviation of Stock K%	=(Variance)^(1/2)	1.84
Covariance Stock J Stock K:
Scenario	Probability	Actual return% -expected return% for A(A)	Actual return% -expected return% For B(B)	(A)*(B)*probability
Bear	0.24	-13.368	-2.638	0.000846355
Normal	0.59	2.432	0.162	2.32451E-05
Bull	0.17	10.432	3.162	0.000560762
			c.Covariance=sum=	0.001430
		d. Correlation A&B=	Covariance/(std devA*std devB)=	0.9651