The Probabilities of an Economic Boom,normal Economy,and a Recession Are

Multiple Choice

The probabilities of an economic boom,normal economy,and a recession are 2 percent,93 percent,and 5 percent,respectively.For these economic states,Stock A has deviations from its expected returns of 0.04,0.07,and −0.11 for the three economic states respectively.Stock B has deviations from its expected returns of 0.14,0.08,and −0.22 for the three economic states,respectively.What is the covariance of the two stocks?

A) 0.00653
B) -0.00743
C) -0.00589
D) 0.00974
E) 0.00802