Question

Year	Stock X	Stock Y
1	12.00%	10.00%
2	4.00%	18.00%
3	15.00%	2.00%
4	1.00%	8.00%

What is the covariance of the returns of Stock X with the returns of Stock Y?

Please round to 6 decimal places.

Answer 1

COV(X,Y) = Sum [ (X - Avg X)( Y -Avg Y) ] / n

Avg X & Avg Y:

Avg X = Sum [ X ] / n

Avg Y = Sum [ Y ] / n

Avg X:

Year	Ret
1	12%
2	4%
3	15%
4	1%
Sum [ X ]	32%
Avg X	8.00%

Avg Y:

Year	Ret
1	10%
2	18%
3	2%
4	8%
Sum [ X ]	38%
Avg X	9.50%

COV(X,Y):

Year	X	(X - Avg X)	Y	(Y - Avg Y)	(X- Avg X)(Y - Avg Y)
1	12.00%	4.00%	10.00%	0.50%	0.000200
2	4.00%	-4.00%	18.00%	8.50%	-0.003400
3	15.00%	7.00%	2.00%	-7.50%	-0.005250
4	1.00%	-7.00%	8.00%	-1.50%	0.001050
Sum [ ( X- Avg X)(Y-Avg Y)					-0.007400
COV(X,Y) = Sum [ ( X- Avg X)(Y-Avg Y) ] / n					-0.001850