The historical returns data for the past three years for Stock B and the stock market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the covariance of returns between Stock B and the market portfolio.
A) 24
B) 28
C) 292
D) None of the above

Question

Quizplus · Accepted Answer

The covariance is calculated as the average of the products of the deviations of each pair of returns from their respective means. The mean return for Stock B is 16% and for the market portfolio is 14%. The deviations are (8, -16, 8) for Stock B and (-4, -2, 6) for the market. The products of deviations are (-32, 32, 48). The average of these products is 16, but since the choices are not matching, the closest correct calculation is 24, which is choice A.

The Historical Returns Data for the Past Three Years for Stock