The return on the Rush Corporation in the state of recession is estimated to be
ID: 2790552 • Letter: T
Question
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 34%. The return on the Oberman Corporation in the state of recession is estimated to be 44% 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 0.60 probability that the economy will be in the state of boom and a 0.40 probability that the economy will be in the state of recession.
Explanation / Answer
State of Economy Probability [p] Return RUSH (%) p*r d[x] = r-E[r] BOOM 0.6 34 20.4 22.4 RECESSION 0.4 -22 -8.8 -33.6 Expected return-E[r]= 11.6% 11.6 State of Economy Probability [p] Return OBERMAN (%) p*r d[y] = r-E[r] BOOM 0.6 -15 -9 -23.6 RECESSION 0.4 44 17.6 35.4 Expected return-E[r]= 8.6% 8.6 CALCULATION OF COVARIANCE: State of Economy Probability [p] dx*dy p*dx*dy BOOM 0.6 -528.64 -317.184 RECESSION 0.4 -1189.44 -475.776 Covariance -792.960 Answer
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