standard deviation of returns on each stock
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10.2 Suppose you have invested only in two stocks, A and B.The returns on the two stocks de¬pend on the following three states of the economy, which are equally likely to happen:
State of probability of return on
Economy state occurring Stock B (%)
Bear 6.30 -3.70
Normal 10.50 6.40
Bull 15.60 25.30
a. Calculate the expected return on each stock.
b. Calculate the standard deviation of returns on each stock.
c. Calculate the covariance and correlation between the returns on the two stocks.
10.11 Miss Maple is considering two securities, A and B, with the relevant information given below:
State of Return on Return on Return on
Economy Probability Security A (%) Security B (%)
Bear 0.4 3.0 6.5
Bull 0.6 15.0 6.5
a. Calculate the expected return and standard deviation of each of the two securities.
b. Suppose Miss Maple invested $2,500 in security A and $3,500 in security B. Cal expected return and standard deviation of her portfolio.
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Solution Summary
Calculate the covariance and correlation between the returns on the two stocks.
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