Question

Assume that there are three states of the world in a year: good, neutral and bad....

Assume that there are three states of the world in a year: good, neutral and bad.
Suppose that the annual returns on the market and a company A in each state of the world are as follwos:
State of the world Probability Market return Stock A return
Good 0.3 0.2 0.05
Neutral 0.5 0.05 -0.05
Bad 0.2 -0.1 0.15

a) Construct the probability distribution of the states of the world over the 2-year period.

b) Calculate the expected return and standard deviation of the market over the 2-year period.

c) Same question for the stock return of company A.

d) Calculate the beta of A, its covariance and correlation with the market.

Math   Statistics-And-Probability   
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