Chapter 11, Problem 25QAP

Summary Introduction

Adequate information:

Probability in Bear $\left({\text{P}}_{\text{Be}}\right)$ = 0.3333

Probability in Normal $\left({\text{P}}_{\text{No}}\right)$ = 0.3333

Probability in Bull $\left({\text{P}}_{\text{Bu}}\right)$ = 0.3333

Expected return for Stock A in Bear $\left(\text{R}{\left(\text{A}\right)}_{\text{Be}}\right)$ = 0.099

Expected return for Stock A in Normal $\left(\text{R}{\left(\text{A}\right)}_{\text{No}}\right)$ = 0.113

Expected return for Stock A in Bull $\left(\text{R}{\left(\text{A}\right)}_{\text{Bu}}\right)$ = 0.059

Expected return for Stock B in Bear $\left(\text{R}{\left(\text{B}\right)}_{\text{Be}}\right)$ = -0.073

Expected return for Stock B in Normal $\left(\text{R}{\left(\text{B}\right)}_{\text{No}}\right)$ = 0.128

Expected return for Stock B in Bull $\left(\text{R}{\left(\text{B}\right)}_{\text{Bu}}\right)$ = 0.293

To compute: Expected return, standard deviation, covariance, and correlation

Introduction: The expected return of the stocks refers to the return expected on the stocks. Standard deviation measures the deviation between the actual prices and the average price. Covariance reflects the relationship of two random variables and projects the impact of one variable whenever the other one changes. Correlation refers to the degree of fluctuation of two variables in relation to one another.