Question

Based on the following information: State of Economy Return on Stock A Return on Stock B Bear .117 −.060 Normal .100 .163 Bull .088 .248 Assume each state of the economy is equally likely to happen. Calculate the expected return of each of the following stocks. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) Expected return Stock A % Stock B % Calculate the standard deviation of each of the following stocks. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) Standard deviation Stock A % Stock B % What is the covariance between the returns of the two stocks? (Negative amount should be indicated by a minus sign, Do not round intermediate calculation and round your final answer to 6 decimal places. (e.g., 32.161616)) Covariance What is the correlation between the returns of the two stocks? (Negative amount should be indicated by a minus sign, Do not round intermediate calculation round your final answer to 4 decimal places. (e.g., 32.1616)) Correlation

Answer 1

The task is to perform calculations for the expected return, standard deviation, covariance, and correlation of two stocks based on their returns in different economic states, with the formulas provided being the methodology for each calculation.

Step-by-step explanation:

The question involves calculating the expected return, standard deviation, covariance, and correlation of two stocks given different states of the economy (Bear, Normal, Bull), and the associated returns for each state. To calculate the expected return, you multiply each possible return by the probability of that state occurring and sum those values. The standard deviation measures the volatility of the stock returns and involves calculating the square root of the weighted average of the squared deviations from the mean return. Covariance measures how two stocks move together, and you calculate it by taking the product of the deviations of each stock's return from their mean, multiplying by the probability, and summing up for all states. Correlation is a standardized measure of covariance and is calculated by dividing the covariance by the product of the standard deviations of the two stocks.