cxz0858

A

8586

Correct answer = B

"Probability Concepts," Richard A. Defusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkel
2008 Modular Level I, Vol. 1, pp. 347-348
Study Session 2-8-l
calculate and interpret covariance given a joint probability function
Expected return on security A = 0.6 x 25% + 0.4 x 20% = 15% + 8% = 23%
Expected return on security B = 0.6 x 30% + 0.4 x 20% = 18% + 8% = 26%
Cov (R_AR_B) = 0.6 [(25 - 23)(30 - 26)] + 0.4 [(20 - 23)(20 - 26)]
= 0.6(2 x 4) + 0.4(-3 x -6) = 0.6(8) + 0.4(18) = 4.8 + 7.2 = 12%