2. Let random variables A and B be the monthly returns of stocks A and B, respectively. Let C be themonthly returns of Crude Oil Index (WTI). Supposep(A,C) = correlation between A and C= 0.50p(B,C) = correlation between B and C= -0.45• p(A,B) = correlation between A and B = -0.15o(A) = standard deviation of A = 0.45o(B) = standard deviation of B = 0.75o(C) = standard deviation of C= 0.55Moreover, suppose you decided to form a portfolio D, which invests 60% in stock A and 40% instock B. Let random variable D be the monthly returns of portfolio D.a.b.C.Y: Determine the covariances between (i.) A and C, (ii.) B and C, and, (iii.) A and B.Compute for the covariance between C and D.Compute for the expected standard deviation of D.

1. covariance(A,C) = correlation(A,C) * sigma(A) * sigma(C) = 0.5 * 0.45 * 0.55 = 0.12375…

Answered: a. C. : Determine the covariances…

a. C. : Determine the covariances between (i.) A and C, (ii.) B and C, and, (iii.) A and B. Compute for the covariance between C and D. Compute for the expected standard deviation of D.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 6P: The market and Stock J have the following probability distributions: a. Calculate the expected rates...

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Question

2. Let random variables A and B be the monthly returns of stocks A and B, respectively. Let C be the
monthly returns of Crude Oil Index (WTI). Suppose
p(A,C) = correlation between A and C= 0.50
p(B,C) = correlation between B and C= -0.45
• p(A,B) = correlation between A and B = -0.15
o(A) = standard deviation of A = 0.45
o(B) = standard deviation of B = 0.75
o(C) = standard deviation of C= 0.55
Moreover, suppose you decided to form a portfolio D, which invests 60% in stock A and 40% in
stock B. Let random variable D be the monthly returns of portfolio D.
a.
b.
C.
Y
: Determine the covariances between (i.) A and C, (ii.) B and C, and, (iii.) A and B.
Compute for the covariance between C and D.
Compute for the expected standard deviation of D.

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