The probabilities of an economic boom, normal economy, and a recession are 2 percent, 93 percent, and 5 percent, respectively. For these economic states, Stock A has deviations from its expected returns of 0.04, 0.07, and −0.11 for the three economic states respectively. Stock B has deviations from its expected returns of 0.14, 0.08, and −0.22 for the three economic states, respectively. What is the covariance of the two stocks?

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Solution To calculate the covariance between Stock A and Stock B we first need to calculate the expe... View the full answer