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Calculate the covariance and correlation of two securities

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Reference no: EM132758291

Question - You are considering investing in one or both of the two financial securities i and j that have the following distribution of possible one-year returns. As a financial analyst, you have estimated four possible states of nature with equal probability, the returns and probability for the two securities are as follows:

Probability (Pij) Possible rate of return (Ri) Possible rate of return (Rj)

0.2 5.00% 10.00%

0.3 12.00% 15.00%

0.2 25.00% 10.00%

0.3 20.00% 9.00%

Required -

i. Calculate the covariance and correlation of two securities.

ii. If the financial manager consider a portfolio of the two securities i and j, where the weight of i is set at 55%, expected return of the portfolio, variance and standard deviation of the portfolio?

Reference no: EM132758291

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