Los 5.b

Question 2

How do you calculate the expected return of an asset given a probability model of its returns in different scenarios?

Answer 2

The expected return is the sum of each possible return multiplied by its probability:

Question 3

How do you calculate the covariance between two assets’ returns given a joint probability model?

Answer 3

Calculate each asset’s expected return:
Covariance: Sum of the joint probabilities times the product of each asset’s deviation from its expected return).

Answer 4

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