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Computing Variance and Covariance

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Consider 2 stocks with return K1 and K2 given by

Scenario Probability Return k1 Return K2
w1 0.5 10% 7%
w2 0.5 12% 10%

Compute Var(k1), Var(k2), and Cov(k1, k2). Note Ki is the log returns.

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Solution Summary

The solution contains a detailed step-by-step procedure on how to compute the variance on a set of numbers, and the covariance between two set of numbers. Specific illustration is done using an example of a case on the returns (K1, K2) of 2 stocks as in the problem.

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