Stock A is expected to return 12 percent in a normal economy and lose 7 percent in a recession. Stock B is expected to return 8 percent in a normal economy and 2 percent in a recession. The probability of the economy being normal is 80 percent and the probability of a recession is 20 percent. Compute the covariance of these two securities.

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To compute the covariance of two securities we need to know the expected returns of each security th... View the full answer