Question

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 to happen.

Calculate the expected return of each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

	Expected return
Stock A	______%
Stock B	______%

  
Calculate the standard deviation of each stock. (Do not round intermediate calculations. Enter your 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. Do not round intermediate calculations and round your answer to 6 decimal 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. Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)
Correlation _________   

Answer 1

1.
Stock A=(0.119+0.098+0.09)/3=0.1023333
Stock B=(-0.062+0.165+0.25)/3=0.117666667

2.
Stock A=sqrt(1/3*(0.119-0.1023333)^2+1/3*(0.098-0.1023333)^2+1/3*(0.09-0.1023333)^2)=0.01223
Stock B=sqrt(1/3*(-0.062-0.117666667)^2+1/3*(0.165-0.117666667)^2+1/3*(0.25-0.117666667)^2)=0.13170

3.
=sqrt(1/3*(0.119-0.1023333)*(-0.062-0.117666667)+1/3*(0.098-0.1023333)*(0.165-0.117666667)+1/3*(0.09-0.1023333)*(0.25-0.117666667))
=-0.001610556

4.
=-0.001610556/(0.01223*0.13170)
=-1