Question
In: Finance
Consider the following two stocks. Probabilities (pi ) Stock "a" Stock "b" Recession p1= 31% -4%...
Consider the following two stocks.
| Probabilities (pi ) | Stock "a" | Stock "b" | |
| Recession | p1= 31% | -4% | 4% |
| Normal | p2= 26% | 7% | -4% |
| Boom | p3= 43% | 11% | 26% |
Expected Return
r¯a = 5.31
r¯b = 11.38
Standard Deviation
SDa = 6.44
SDb = 13.05
Question:
Using the correct answers from the previous questions, what is the covariance between the two stocks? Enter your answer rounded to 2 decimal places.
Cov(a, b) = ?
Solutions
Expert Solution
|
Probability |
Stock a |
Stock b |
Deviation Stock a |
Deviation Stock b |
|
|
Recession |
31% |
(4.00) |
4.00 |
(9.31) |
(7.38) |
|
Normal |
26% |
7.00 |
(4.00) |
1.69 |
(15.38) |
|
Boom |
43% |
11.00 |
26.00 |
5.69 |
14.62 |
Covariance between Stock a and Stock b = Σ P*Deviation Stock a*Deviation Stock b
= 31%*(-9.31)*(-7.38)+26%*1.69*(-15.38)+43%*5.69*14.62
= 50.31
jeff jeffy answered 2 years agoRelated Solutions
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