Hello, How are you ? I have some investment questions and I want you help me to
ID: 2784076 • Letter: H
Question
Hello, How are you ? I have some investment questions and I want you help me to answer them as soon as possible.
1) Based on the outcomes in the following table choose which of the following statements below is (are) correct ?
Scenario
Security A
Security B
Security C
recession
Return>E(r)
Return<E(r)
Return=E(r)
normal
Return=E(r)
Return=E(r)
Return=E(r)
boom
Return<E(r)
Return>E(r)
Return=E(r)
I. The covariance of security A and security B is positive
II. The covariance between securities A and C is negative
III. The covariance between securities B and C is zero
IV. The covariance between securities B and C is positive
A) I ONLLY
B) II and IV only
C) II and III only
D) I,II and III
E) II,III,and IV
2) The standard deviation of return on investment A is .20 while the standard deviation of return on investment B is .12 If the covariance of returns on A and B is .0072, the correlation coefficient between the returns on A and B is _____
A) 0.20
B) 0.30
C) 0.36
D) 0.60
E) 0.77
3) Suppose that a stock portfolio and a bond portfolio have a positive correlation this means that
A) The returns on the stock and bond portfolios tend to move inversely
B) The returns on the stock and bond portfolios tend to very independently of each other
C) The returns on the stock and bond portfolios tend to move together
D) The covariance of the stock and bond portfolios will be zero
E) The covariance of the stock and bond portfolios will be negative
Scenario
Security A
Security B
Security C
recession
Return>E(r)
Return<E(r)
Return=E(r)
normal
Return=E(r)
Return=E(r)
Return=E(r)
boom
Return<E(r)
Return>E(r)
Return=E(r)
Explanation / Answer
1)
The covariance between securities A and C is negative (II)
The covariance between securities B and C is positive (IV)
II and IV correct (Option B)
2)
correlation coefficient = covariance / (SDA * SDB )
correlation = 0.0072 / (0.2*0.12) = 0.3 (Option B)
3)
Corelation > 0, Returns and risk will move together (Option C)
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