Copyright

Given the returns and probabilities for the three possible states listed here, calculate the...

Question:

Given the returns and probabilities for the three possible states listed here, calculate the covariance between the returns of Stock A and Stock B. For convenience, assume that the expected returns of Stock A and Stock B are 0.13 and 0.16, respectively.

Probability Return(A) Return(B)
Good0.350.300.50
OK0.500.10 0.10
Poor0.15- 0.25- 0.30

Covariance:

Covariance refers to the statistical tool that measures the movement of prices of any two stocks. The link between the variation in the two idiosyncratic stocks is covariance. It shows how one stock corresponds with a movement in another stock.

Answer and Explanation: 1

Become a Study.com member to unlock this answer! Create your account

View this answer

Computation of covariance between the returns of Stock A and Stock B.

Probability(A)(B)dA
(Return - Expected Return)
dB
(Return - Expected Return)
P X...

See full answer below.


Learn more about this topic:

Loading...
Portfolio Weight, Return & Variance: Definition & Examples

from

Chapter 12 / Lesson 1
20K

A portfolio can be designed in several different ways. It is important to understand the basics of a portfolio before building and managing one. In this lesson, we will go over the weight, return, and variance of a portfolio.


Related to this Question

Explore our homework questions and answers library