Covariance and Correlation

The following table shows the expected returns from six different stocks in three different states of the economy:

State of Economy	Probability	Return Stock A	Return Stock B	Return Stock C	Return Stock D	Return Stock E	Return Stock F
Growth	1/3	30%	3%	15%	24%	0%	18%
Status Quo	1/3	22%	1%	3%	6%	3%	3%
Recession	1/3	20%	4%	-3%	-6%	6%	-3%

C. Consider of a portfolio consisting of 50% in Stock A and 50% in Stock B. Calculate the covariance between Stocks A and B. Calculate the expected return of the portfolio. Calculate the standard deviation of the portfolio.

D. Consider of a portfolio consisting of 50% in Stock C and 50% in Stock D. Calculate the covariance between Stocks C and D. Calculate the expected return of the portfolio. Calculate the standard deviation of the portfolio.

E. Consider of a portfolio consisting of 50% in Stock E and 50% in Stock F. Calculate the covariance between Stocks E and F. Calculate the expected return of the portfolio. Calculate the standard deviation of the portfolio.

A) Expected Returns
E[RA]	E[RB]	E[RC]	E[RD]	E[RE]	E[RF]
24.00%	2.67%	5.00%	8.00%	3.00%	6.00%
B) Standard Deviations
A	B	C	D	E	F
0.09%	0.01%	0.03%	0.16%	0.01%	0.03%
C) Portfolio AB
WA	WB	CovAB	CorrAB	E[RAB]	AB
D) Portfolio CD
WC	WD	CovCD	CorrCD	E[RCD]	CD
E) Portfolio EF
WE	WF	CovEF	CorrEF	E[REF]	EF