The historical returns for the past three years for Stock B and the stock market portfolio are: Stock B: 24%,0%,24%; Market portfolio: 10%,12%,20%.Calculate the observed covariance of returns between Stock B and the market portfolio.

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 for Stock B are 8%, -16%, 8% and for the market are -4%, -2%, 6%. The products of these deviations are -32, 32, and 48. The average of these products is 16, which is then multiplied by the number of observations (3) to get the covariance: 24.

The Historical Returns for the Past Three Years for Stock