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 meanand standard deviationof the annual return on each stock.
(b) Calculate the co-variance and correlationbetween 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.
Solution depicts the steps to calculate mean, standard deviation, co-variance and correlation in the given case.