josmanu235
18.11.2020 •
Business
Stock A is expected to return 14 percent in a normal economy and lose 21 percent in a recession. Stock B is expected to return 11 percent in a normal economy and 5 percent in a recession. The probability of the economy being normal is 75 percent with a 25 percent probability of a recession. What is the covariance of these two securities?a) 0.007006b) 0.006563c) 0.005180d) 0.007309e) 0.006274
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Ответ:
The correct option is b) 0.006563.
Explanation:
Note: See the attached excel file for the calculation of the covariance between stocks A and B.
Covariance refers to a metric that measures the relationship between two random variables by showing the degree to which the two variables change together.
A positive covariance means that two variables move in the same direction, while a negative covariance indicates that the two variables tend to move in the opposite directions.
In the attached excel file, the following are used:
RA = Rate of Return of Stock A
RB = Rate of Return of Stock B
P = Probability
ERA = Expected return of Stock A = RA * P
ERB = Expected return of Stock B = RB * P
DA = Deviation of Stock A = RA - Sum of ERA
DB = Deviation of Stock B = RB - Sum of ERB
N = Number of observation = 2
Therefore, Covariance of Stock A and B is calculated using the covariance formula as follows:
Covariance of Stock A and B = Sum of (DA * DB) / N = 1.3125% / 2 = 0.6563%, or 0.006563
Therefore, the covariance of these two securities is 0.006563. This shows that the correct option is b) 0.006563.
Ответ:
Before a discussion, I would be sure to finish the reading and make notes about things I noticed. I would listen closely to others and look for ways to add my ideas. I would be respectful if I disagreed and ask questions if I didn’t understand.