Based on the following information: Assume each state of the economy is equally

Question

Based on the following information: 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 round your final answers to 2 decimal places, (e.g., 32.16)) Calculate the standard deviation of each of the following stocks. (Do not round intermediate calculations and round your final answers to 2 decimal places, (e.g., 32.16)) What is the covariance between the returns of the two stocks? (Negative amount should be indicated by a minus sign. Do not round intermediate calculation and round your final answer to 6 decimal places, (e.g., 32.161616)) What is the correlation between the returns of the two stocks? (Negative amount should be indicated by a minus sign. Do not round intermediate calculation round your final answer to 4 decimal places, (e.g., 32.1616))

Explanation / Answer

Answer:

Expected Return for Stock A = (0.108 + 0.109 + 0.079) / 3 = 0.09867

Expected Return for Stock B = (-0.051 + 0.154 + 0.239) / 3 = 0.114

Standard Deviation for Stock A = [(0.108 - 0.09867)2 + (0.109 - 0.09867)2 + (0.079 - 0.09867)2 ] / 3 = 0.000087049

Standard Deviation for Stock B = [(-0.051 - 0.114)2 + (0.154 - 0.114)2 + (0.239 - 0.114)2 ] / 3 = 0.014817

Covariance of A and B = [(0.108 - 0.09867) x (-0.051 - 0.114) + (0.109 - 0.9867) x (0.154 - 0.114) + (0.079 - 0.09867) x (0.239 - 0.114)] / (3 - 1) = 0.00179

Correlation between A and B = Covariance / SD of A x SD of B = 0.00179 / 0.000087049 x 0.014817 = -1389.7777

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