You believe that there is a 40 percent chance that stock A will decline by 10 percent and a 60 percent chance that it will rise by 20 percent. Correspondingly, there is a 30 percent chance that stock B will decline by 10 percent and a 70 percent chance that it will rise by 20 percent. The correlation coefficient between the two stocks is 0.70. Calculate the expected return, the variance, and the standard deviation for each stock. Then calculate the covariance between their returns.

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SOLUTION THERE ARE TWO STOCKS STOCK A AND STOCK B THE ... View the full answer