a. Calculate the expected return for each of the stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation for each of the stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the covariance between the returns of the two stocks

a) Expected return = Probability of recession*Return during recession + Probability of normal*Return during normal + Probability of boom*Return during boom

Expected return for stock A = 0.21*0.04 +0.61*0.12 + 0.18*0.30

Expected return for stock A = 0.1356

Expected return for stock A = 13.56%

Expected return for stock B = 0.21*-0.41 + 0.61*0.31 + 0.18*0.54

Expected return for stock B = 0.2002

Expected return for stock B = 20.02%

b) Standard deviation of stock = √{Probability(Recession)*(Rate during recession - expected rate )^2 + Probability(Normal)(Rate during normal - expected return)^2 + Probability(Boom)*(Rate in boom - Expected return)^2}

Standard deviation of stock A = √[(0.21*(0.04-0.1356)^2 + 0.61*(0.12 - 0.1356)^2 + 0.18*(0.30-0.1356)^2)^0.5]

Standard deviation of stock A = 0.0832

Standard deviation of stock A = 8.32

Standard deviation of stock B = √(0.21*(-0.41-0.2002)^2 + 0.61*(0.31 - 0.2002)^2 + 0.18*(0.54-0.2002)^2)^0.5]

Standard deviation of stock B = 0.3260

Standard deviation of stock B = 32.60%