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 -25% 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 43% 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 0.70 probability that the economy will be in the state of boom and a 0.30 probability that the economy will be in the state of recession.

Place your answer in decimal form and not as a percentage

Explanation / Answer

Mean of Rush = 0.3*(-25%) + 0.7*(33%) = 15.6% = 0.156

Mean of Oberman = 0.3*(43%) + 0.7*(-20%) = -1.1% = -0.0101

Covarainace = 0.3*(-0.25-0.156)*(0.43-( -0.0101)) + 0.7*(0.33-0.156)*(-0.2-( -0.0101))

                  = -0.07673

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