The return on the Rush Corporation in the state of recession is
estimated to be -22% and the return on Rush in the
state of boom is estimated to be 33%. The return
on the Oberman Corporation in the state of recession is estimated
to be 40% and the return on Oberman in the state
of boom is estimated to be -15%. Given this
information, what is the covariance between Rush and Oberman if
there is a 0.40 probability that the economy will
be in the state of boom and a 0.60 probability
that the economy will be in the state of recession.
Expected Return of Rush corporation =0.40*33%+0.6*-22%=0%
Expected Return of Oberman corporation =
0.40*-15%+0.6*40%=18%
Covariance of Portfolio = Probability of Boom *(Return of Rush in
boom -Expected Return)*(Return of Oberman in Boom)+ Probability of
Recession *(Return of Rush in Recession -Expected Return)*(Return
of Oberman in Recession)
=0.4*(33%-0)*(-25%-18%)+0.6*(-22%-0)*(40%-18%) = -0.0858
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