Question: Given the returns and probabilities for the 3 possible states listed here, calculate the covariance between the returns if Stock A & Stock B. for convenience, suppose that the expected returns of stock A & Stock B are 11.75% and 18% , respectively.
|
|
Probability
|
Return(A)
|
Return(B)
|
|
Good
|
0.35
|
0.30
|
0.50
|
|
OK
|
0.50
|
0.10
|
0.10
|
|
Poor
|
0.15
|
-0.25
|
-0.30
|