Question

Consider the following information on the expected return for companies X and Y. Economy Probability X Y Boom 0.17 31% 12% Neutral 0.60 17% 24% Poor 0.23 −31% 10% a. Calculate the expected value and the standard deviation of returns of companies X and Y. (Round your final answers to 2 decimal places.) Company X Company Y Expected value % % Standard deviation % % b. Calculate the correlation coefficient if the covariance between X and Y is 70. (Round your answer to 4 decimal places.) Correlation coefficient

Answer 1

a) Company X expected value =8.34 %

Company Y expected value =18.74 %

Company X Standard deviation =sqrt(488.2444)=22.10

Company Y Standard deviation =sqrt(41.8924)=6.47

b)

Correlation coefficient =Covariance/sqrt(Var(X)*Var(Y))=70/sqrt(488.2444*41.8924)=0.4895