The return on the Rush Corporation in the state of recession isestimated to be -20% and the return on Rush in the state of boom isestimated to be 35%. The return on the Oberman Corporation in thestate of recession is estimated to be 40% and the return on Obermanin the state of boom is estimated to be -20%. Given thisinformation, what is the covariance between Rush and Oberman ifthere is a 0.70 probability that the economy will be in the stateof boom and a 0.30 probability that the economy will be in thestate of recession.
The return on the Rush Corporation in the state of recession isestimated to be -20% and the return on Rush in the state of boom isestimated to be 35%. The return on the Oberman Corporation in thestate of recession is estimated to be 40% and the return on Obermanin the state of boom is estimated to be -20%. Given thisinformation, what is the covariance between Rush and Oberman ifthere is a 0.70 probability that the economy will be in the stateof boom and a 0.30 probability that the economy will be in thestate of recession.
Related questions
This is a table about possible rates of return on Stock A and B:
| State of the economy | Probability | Stock A | Stock B |
| Deep recession | 0.05 | -20% | -30% |
| Mild recession | 0.25 | 10% | 5% |
| Average | 0.35 | 15% | 20% |
| Mild boom | 0.20 | 20% | 25% |
| Strong boom | 0.15 | 25% | 30% |
The following data have been calculated:
SD(A) = 9.34%, SD(B) = 13.68%, Covariance between Stock A & B = 124.38%, Correlation between Stock A & B = 0.9735
(a) Would it be advisable to form a portfolio of both Stock A and B to diversify risk? Explain reasons in words.
(b) Short-selling either stock is allowed (ie. weights need not be all positive), find the minimun variance one can get by forming a portfolio of Stock A and B.
| Rate of Return | |||||
| Scenario | Probability | Stocks | Bonds | ||
| Recession | .20 | รขยย5 | % | +14 | % |
| Normal economy | .60 | +15 | +8 | ||
| Boom | .20 | +25 | +4 | ||
| Consider a portfolio with weights of .60 in stocks and .40 in bonds. |
| a. | What is the rate of return on the portfolio in each scenario? (Do not round intermediate calculations. Round your answers to 1 decimal place.) |
| Scenario | Rate of Return |
| Recession | % |
| Normal economy | % |
| Boom | % |
| b. | What are the expected rate of return and standard deviation of the portfolio? (Do not round intermediate calculations. Round your answers to 2 decimal places.) |
| Expected rate of return | % |
| Standard deviation | % |
| c. | Which investment would you prefer? | ||||||
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