Stock P and Stock Q have had annual returns of -10 percent, 12 percent, 28 percent; and 8 percent, 13 percent, 24 percent, respectively. Calculate the covariance of return between the securities. (Ignore the correction for the loss of a degree of freedom set out in the text.)
A)-149.00
B)+149.00
C)+99.33
D)-100.00

Question

Quizplus · Accepted Answer

To calculate the covariance, first find the average return for each stock: Stock P = (−10 + 12 + 28)/3 = 10%, Stock Q = (8 + 13 + 24)/3 = 15%. Then, calculate the deviations from the mean for each year, multiply the deviations for corresponding years, sum them up, and divide by the number of observations (3). The result is +99.33.

Stock P and Stock Q Have Had Annual Returns of -10