HW1_sol - Purdue University Krannert School of Management...

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Purdue University Krannert School of Management MGMT 411: INVESTMENS Assignment #1 Solution 1. Consider the following situation in which you have 3 states (s1, s2, s3) and 3 securities (R 1 , R 2 , R 3 ): The probability of each state is given in the table. a) What is the expected return of each security? E(R 1 ) = 0.15*35% + 0.03*45% + 0.01*20% = 0.0680 E(R 2 ) = 0.09*35% + 0.12*45% + 0.14*20% = 0.1135 E(R 3 ) = 0.12*35% + 0.08*45% + 0.10*20% = 0.0980 b) What is the standard deviation of the return of each security? σ 1 2 = (0.15 - 0.0680) 2 *35% + (0.03 - 0.0680) 2 *45% + (0.01 - 0.0680) 2 *20% = 0.003676 σ 2 2 = (0.09 - 0.1135) 2 *35% + (0.12 - 0.1135) 2 *45% + (0.14 - 0.1135) 2 *20% = 0.000353 σ 3 2 = (0.12 - 0.0980) 2 *35% + (0.08 - 0.0980) 2 *45% + (0.10 - 0. 0980) 2 *20% = 0.001452 c) What is the covariance between the returns of R 1 and R 2 ? R 2 and R 3 ? R 1 and R 3 ? σ 12 = (0.15 - 0.0680)(0.09 - 0.1135)*35% + (0.03 - 0.0680)(0.12 - 0.1135)*45% + (0.01 - 0.0680)(0.14 - 0.1135)*20% = -0.001093
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This note was uploaded on 02/06/2012 for the course MGMT 411 taught by Professor Clarke during the Spring '09 term at Purdue University.

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HW1_sol - Purdue University Krannert School of Management...

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