Question

1)If the covariance of Stock A with Stock B is .20, then what is the covariance of Stock B with Stock A?
2)Stock A is expected to return 14 percent in a normal economy and lose 21 percent in a recession. Stock B is expected to return 11 percent in a normal economy and 5 percent in a recession. The probability of the economy being normal is 75 percent with a 25 percent probability of a recession. What is the covariance of these two securities?

Answer 1

1.
0.20
Covariance of B with A is same as Covariance of A with B

2.
=75%*(14%-(75%*14%+25%*(-21%)))*(11%-(75%*11%+25%*5%))+25%*(-21%-(75%*14%+25%*(-21%)))*(5%-(75%*11%+25%*5%))
=0.0039