State of Nature.........Probability........State Dependent Return A.........Stat

Question

State of Nature.........Probability........State Dependent Return A.........State Dependent Return B Recession....................70%..........................-.08................................................-.04 Expansion....................30%..........................0.28...............................................0.16 What comes closest to the covariance between Stock A and Stock B? a. .0028 b. .0000 c. .0151 d. -.0028 e. .1170 00000000000000000000000000000000000000000000000000000000000000000000000000000000 State of Nature.........Probability........State Dependent Return A.........State Dependent Return B Recession....................70%..........................-.08................................................-.04 Expansion....................30%..........................0.28...............................................0.16 What comes closest to the variance of Stock A and the standard deviation of Stock B? a. Variance of Stock A = .0115, Standard deviation of Stock B = .0917 b. Variance of Stock A = .0272, Standard deviation of Stock B = .1033 c. Variance of Stock A = .0000, Standard deviation of Stock B = .0000 d. Variance of Stock A = .0115, Standard deviation of Stock B = .1033 e. Variance of Stock A = .0272, Standard deviation of Stock B = .0917 State of Nature.........Probability........State Dependent Return A.........State Dependent Return B Recession....................70%..........................-.08................................................-.04 Expansion....................30%..........................0.28...............................................0.16 What comes closest to the covariance between Stock A and Stock B? .0028 .0000 .0151 -.0028 .1170 00000000000000000000000000000000000000000000000000000000000000000000000000000000 State of Nature.........Probability........State Dependent Return A.........State Dependent Return B Recession....................70%..........................-.08................................................-.04 Expansion....................30%..........................0.28...............................................0.16 What comes closest to the variance of Stock A and the standard deviation of Stock B? a. Variance of Stock A = .0115, Standard deviation of Stock B = .0917 b. Variance of Stock A = .0272, Standard deviation of Stock B = .1033 c. Variance of Stock A = .0000, Standard deviation of Stock B = .0000 d. Variance of Stock A = .0115, Standard deviation of Stock B = .1033 e. Variance of Stock A = .0272, Standard deviation of Stock B = .0917 Variance of Stock A = .0115, Standard deviation of Stock B = .0917 Variance of Stock A = .0272, Standard deviation of Stock B = .1033 Variance of Stock A = .0000, Standard deviation of Stock B = .0000 Variance of Stock A = .0115, Standard deviation of Stock B = .1033 Variance of Stock A = .0272, Standard deviation of Stock B = .0917 a. .0028 b. .0000 c. .0151 d. -.0028 e. .1170 00000000000000000000000000000000000000000000000000000000000000000000000000000000 State of Nature.........Probability........State Dependent Return A.........State Dependent Return B Recession....................70%..........................-.08................................................-.04 Expansion....................30%..........................0.28...............................................0.16 What comes closest to the variance of Stock A and the standard deviation of Stock B? a. Variance of Stock A = .0115, Standard deviation of Stock B = .0917 b. Variance of Stock A = .0272, Standard deviation of Stock B = .1033 c. Variance of Stock A = .0000, Standard deviation of Stock B = .0000 d. Variance of Stock A = .0115, Standard deviation of Stock B = .1033 e. Variance of Stock A = .0272, Standard deviation of Stock B = .0917

Explanation / Answer

Hi,

Please find the answers as follows:

Part 1;

Expected Return (Stock A) = .70*-8 + .30*28 = 2.8%

Expected Return (Stock B) = .70*-4 + .30*16 = 2%

Covariance = 70%*(-.08-.028)*(-.04-.02) + 30%*(.28-.028)*(.16-.02) = .0151

Option C is correct.

Part 2:

Variance of Stock A = .70*(-.08-.028)^2 + .30*(.28-.028)^2 = .027216 or .0272

Variance of Stock B = .70*(-.04-.02)^2 + .30*(.16-.02)^2 = .0084

Standard Deviation pf Stock B = (.0084)^1/2 = .0917

Option E is correct.

Thanks.

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