Question

The following are possible states of the economy and the returns associated with stocks A and B in those states.

State Probability Return on A Return on B

Good 0.3 24% 30%

Normal 0.4 36% 18%

Bad 0.3 48% -6%

Calculate

1) covariance

2) coefficient

3) the expected return of the portfolio consisting of A & B The weight in stock A is 60%.

4) the standard deviation of a portfolio comprised of stocks A and B. The weight in stock A is 60%.

Answer 1

		Expected Return =Mean Return =SUMof ((Probability)*(Return))
		Variance of Return =Sum of(Probability* (Deviation ^2))
		Deviation =Return -Mean Return
		Standard Deviation of Return =Square Root of Variance of Return
		ANALYSIS OF STOCK A
			p	R1	A1=R1*P	D1=R1-36	E1=(D1^2)	F1=p*E1
		State	Probability	Return(%)	Probability*Return(%)	Deviation(%)	Deviation Squared(%%)	Probability*Deviation Squared(%%)
		Good	0.3	24	7.2	-12	144	43.2
		Normal	0.4	36	14.4	0	0	0
		Bad	0.3	48	14.4	12	144	43.2
				SUM	36		SUM	86.4
		Expected Return =Mean return	36	%
		Variance of Return	86.4	%%
		Standard Deviation of Return =SQRT(86.4)=	9.30	%
		ANALYSIS OF STOCK B
			p	R2	A2=R2*p	D2=R2-14.4	E2=(D2^2)	F2=p*E2
		State	Probability	Return(%)	Probability*Return(%)	Deviation(%)	Deviation Squared(%%)	Probability*Deviation Squared(%%)
		Good	0.3	30	9	15.60	243.36	73.008
		Normal	0.4	18	7.2	3.60	12.96	5.184
		Bad	0.3	-6	-1.8	-20.40	416.16	124.848
				SUM	14.4		SUM	203.04
		Expected Return =Mean return	14.4	%
		Variance of Return	203.04	%%
		Standard Deviation of Return =SQRT(203.04)=	14.25	%
		COVARIANCE BETWEEN RETURNS OF SECURITY A AND SECURITY B
		Covariance =SUM of (Probability*Deviation of A* Deviation of B)
			p	D1=R1-15.5	D2=R2-16.8	G=p*D1*D2
		Scenario	Probability	Deviation of Stock A	Deviation of Stock B J	probability*Deviation A*Deviation B
		Very Good	0.30	-12	15.6	-56.16
		Good	0.40	0	3.6	0
		Average	0.30	12	-20.4	-73.44
					SUM	-129.6
		Covariance of return Stock A and Return of Stock B	-129.6	%%
		Correlation of Return Stock A and Stock B=(Covariance)/(Std Deviation A* Standard Deviation B)
		Correlation Coefficient	-0.9784921	(-129.6/(9.3*14.25)
	R1	Expected Return of A	36	%
	R2	Expected Return of B	14.4	%
	V1	Variance of A	86.4	%%
	V2	Variance of B	203.04	%%		0 0 Add a comment Know the answer? Your Answer: Post as a guest Your Name: What's your source? Earn Coins Coins can be redeemed for fabulous gifts. Log In Sign Up Post as anonymous Post Your Answer Not the answer you're looking for? Ask your own homework help question Similar Questions Suppose there are only two possible future states of nature: Good and Bad. There is a... Suppose there are only two possible future states of nature: Good and Bad. There is a 25% probability that the future will be Good. Suppose also that there are two stocks: A and B. Stock A will return 7% if the future is Good and will return 1% if the future is Bad. Stock B will return 3% if the future is Good and -5% if the future is Bad. If you have a portfolio that contains 60% of Stock... Suppose there are only two possible future states of nature: Good and Bad. There is a... Suppose there are only two possible future states of nature: Good and Bad. 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