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Calculating the various statistical parameters

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Suppose there are three states of the economy: boom, moderate growth, and recession. The annual return on company A stock and company B stock in each state of the economy is given below

A return B return Probability
Boom 0.18 0.15 0.15
Moderate growth 0.05 0.03 0.45
Recession -0.04 -0.02 0.4

(a) Calculate the mean and standard deviation of the annual return on each stock.

(b) Calculate the co-variance and correlation between the annual returns of the two companies.

(c) Suppose you invested 60% of your money in company A and 40% in company B. Find the mean and standard deviation of your portfolio's return.

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Solution Summary

Solution depicts the steps to calculate mean, standard deviation, co-variance and correlation in the given case.

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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