Portfolios with more than one asset: Given the returns and probabilities for the three possible states listed here, calculate the covariance between the returns of Stock A and Stock B. For convenience, assume that the expected returns of Stock A and Stock B are 11.75 percent and 18 percent, respectively.
Probability Return A Return B
Good 0.35 0.3 0.5
Ok 0.5 0.1 0.1
Poor 0.15 -0.25 -0.3
Please refer attached file for better clarity of tables and missing formulas.
Probability Return(A) Deviation (A) Return(B) Deviation (B) ...
Solution describes the steps to calculate the covariance between the returns of two given stocks.