You are given the following information:
State of
Economy
Return on
Stock A
Return on
Stock B
Bear
.119
?.062
Normal
.098
.165
Bull
.090
.250
Assume each state of the...
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Finance
You are given the following information:
State of Economy
Return on Stock A
Return on Stock B
Bear
.119
?.062
Normal
.098
.165
Bull
.090
.250
Assume each state of the economy is equally likely tohappen.
Calculate the expected return of each of the following stocks.(Do not round intermediate calculations and enter youranswers as a percent rounded to 2 decimal places, e.g.,32.16.)
Expected return
Stock A
%
Stock B
%
Calculate the standard deviation of each of the followingstocks. (Do not round intermediate calculations and enteryour answers as a percent rounded to 2 decimal places, e.g.,32.16.)
Standard deviation
Stock A
%
Stock B
%
What is the covariance between the returns of the two stocks?(A negative answer should be indicated by a minus sign. Donot round intermediate calculations and round your answerto6decimal places, e.g.,32.161616.)
Covariance
What is the correlation between the returns of the two stocks?(A negative answer should be indicated by a minus sign. Donot round intermediate calculations and round your answerto4decimal places, e.g.,32.1616.)
Correlation
Answer & Explanation
Solved by verified expert
3.9 Ratings (498 Votes)
Stock A
Scenario
Probability
Return%
=rate of return% * probability
Actual return -expected return(A)%
(A)^2* probability
Bear
0.3333
11.9
3.96627
1.66769
9.26971E-05
Normal
0.3333
9.8
3.26634
-0.43231
6.22911E-06
Bull
0.3333
9
2.9997
-1.23231
5.06145E-05
Expected return %=
sum of weighted return =
10.23
Sum=Variance Stock A=
0.00015
Standard deviation of Stock A%
=(Variance)^(1/2)
1.22
Stock B
Scenario
Probability
Return%
=rate of return% * probability
Actual return -expected return(A)%
(B)^2* probability
Bear
0.3333
-6.2
-2.06646
-17.96549
0.010757552
Normal
0.3333
16.5
5.49945
4.73451
0.000747111
Bull
0.3333
25
8.3325
13.23451
0.005837825
Expected return %=
sum of weighted return =
11.77
Sum=Variance Stock B=
0.01734
Standard deviation of Stock B%
=(Variance)^(1/2)
13.17
Covariance
Stock A Stock B:
Scenario
Probability
Actual return% -expected return% for A(A)
Actual return% -expected return% For B(B)
(A)*(B)*probability
Bear
0.3333
1.66769
-17.96549
-0.000998596
Normal
0.3333
-0.43231
4.73451
-6.8219E-05
Bull
0.3333
-1.23231
13.23451
-0.00054358
Covariance=sum=
-0.001610
Correlation A&B=
Covariance/(std devA*std devB)=
-0.1
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