You are given the following information State of Economy Bear Normal Bull Return

Question

You are given the following information State of Economy Bear Normal Bull Return on Stock A 112 105 083 Return on Stock B -.055 158 243 Assume each state of the economy is equally likely to happen Calculate the expected return of each of the following stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Stock A Stock B Expected return 10.00 11.53 % Calculate the standard deviation of each of the following stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Standard deviation Stock A 1.24 % Stock B 12.53 What is the covariance between the returns of the two stocks? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 6 decimal places, e.g., 32.161616.) Covariance What is the correlation between the returns of the two stocks? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) Correlation 0.8611421

Explanation / Answer

1. Expected return of A = 0.112/3 + 0.105/3 + 0.083/3 = 0.10 or 10%

Expected return of B = -0.055/3 + 0.158/3+0.243/3 = 0.1153 or 11.53%

2. Standard deviation of stock A = [(1/3)*(0.112-0.10)^2 + (1/3)*(0.105 – 0.10)^2 + (1/3)*(0.083-0.10)^2]^0.5

= 1.24%

Standard deviation of B = [(1/3)*(-0.055-0.1153)^2 + (1/3)*(0.158 – 0.1153)^2 + (1/3)*(0.243-0.1153)^2]^0.5

= 12.53%

3. Covariance = sum of (return A – average A)*(return B – average B)/(sample size -1)

Thus covariance = -13.336667

4. Correlation = covariance/standard deviation of A*standard deviation of B

= -13.336667/(1.24*12.53)

= -0.8611421

1 2 A's return (%) B's return (%) A's return % - expected return % of A B's return % - expected return % of B 1*2 11.20 -5.50 1.20 -17.03 -20.44 10.50 15.80 0.50 4.27 2.14 8.30 24.30 -1.70 12.77 -21.71 Expeced return (%) 10.00 11.53 Total -40.010000 Total/(3) -13.336667

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.