# Important information about Expected Return/Standard Deviation

Suppose you have invested in only two stocks, Y and Z. The returns on the two stocks depend on the following three states of the economy, which are equally likely to happen.

State of Economy Return on Stock Y (%) Return on Stock Z (%)

Recession 6.30 -3.70

Normal 10.50 6.40

Boom 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 of the two stocks.

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#### Solution Preview

Suppose you have invested in only two stocks, Y and Z. The returns on the two stocks depend on the following three states of the economy, which are equally likely to happen.

State of Economy Return on Stock Y (%) Return on Stock Z (%)

Recession 6.30 -3.70

Normal 10.50 6.40

Boom 15.60 25.30

a. Calculate the ...

#### Solution Summary

The solution explains how to calculate the expected return, standard deviation of returns, the covariance and correlation