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The return on the Rush Corporation in the state of recession is estimated to be -25%...

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The return on the Rush Corporation in the state of recession isestimated to be -25% and the return on Rush in thestate of boom is estimated to be 35%. The returnon the Oberman Corporation in the state of recession is estimatedto be 45% and the return on Oberman in the stateof boom is estimated to be -18%. Given thisinformation, what is the covariance between Rush and Oberman ifthere is a 0.50 probability that the economy willbe in the state of boom and a 0.50 probabilitythat the economy will be in the state of recession.

Please give specific calculations, thanks!!!

Answer & Explanation Solved by verified expert
4.3 Ratings (730 Votes)

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

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