The return on the Rush Corporation in the state of recession is estimated to be

Question

The return on the Rush Corporation in the state of recession is estimated to be -21% and the return on Rush in the state of boom is estimated to be 33%. The return on the Oberman Corporation in the state of recession is estimated to be 40% and the return on Oberman in the state of boom is estimated to be -20%. 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

Expected Return Rush Corp (21%)*0.4+33%*0.6 0.114 11.4%' Oberman Corp 40%*0.40+(20%)*0.60 0.04 4%' Rush Corp State given Expected d1 Recession -21 11.4 -32.4 Boom 33 11.4 21.6 Oberman Corp State given Expected d1 Recession 40 4 36 Boom -20 4 -24 Covariance = Prob * d1 * d2                    = -777.6 State d1 d2 p p*d1*d2 Recession -32.4 36 0.4 -466.56 Boom 21.6 -24 0.6 -311.04 -777.6

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