Covariance and CorrelationThe following table shows the expected returns from six different stocks in three different states of the economy:State of EconomyProbabilityReturn Stock AReturn Stock BReturn Stock CReturn Stock DReturn Stock EReturn Stock FGrowth0.2531%3%15%21%0%18%Status Quo0.5021%1%3%7%4%3%Recession0.2520%4%-5%-6%6%-4% Consider of a portfolio consisting of 50% in Stock E and 50% in Stock F. Calculate the covariance between Stocks E and F. Calculate the expected return of the portfolio. Calculate the standard deviation of the portfolio.

Note: all the reuired calculations mentioned in the question is solved. Covariance, Expected Return…

Answered: Covariance and Correlation The…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter2: The Domestic And International Financial Marketplace

Section: Chapter Questions

Problem 1P

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Covariance and Correlation

The following table shows the expected returns from six different stocks in three different states of the economy:

State of Economy	Probability	Return Stock A	Return Stock B	Return Stock C	Return Stock D	Return Stock E	Return Stock F
Growth	0.25	31%	3%	15%	21%	0%	18%
Status Quo	0.50	21%	1%	3%	7%	4%	3%
Recession	0.25	20%	4%	-5%	-6%	6%	-4%

Consider of a portfolio consisting of 50% in Stock E and 50% in Stock F. Calculate the covariance between Stocks E and F. Calculate the expected return of the portfolio. Calculate the standard deviation of the portfolio.

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