Question: Mr. Henry can invest in Highbull stock and Slowbear stock. His projection of the returns on these two stocks is as follows:
State of Economy Probability of State Return for Highbull Return for Slowbear
recession 0.25 -2.0% 5.0%
normal 0.60 9.02% 6.2%
boom 0.15 15.40% 7.4%
1) Calculate the expected return on each stock
2) Calculate the standard deviation of returns on each stock.
3) Calculate the covariance and correlation between the returns on the two stocks.