Assuming that the three economic scenarios are equally likely, compute the covariances and the correlation matrix for the four ABCO subsidiaries.

Show that an alternative covariance formula, generates the same covariances.

ABCO is a conglomerate that has $4 billion in common stock. Its capital is invested in four subsidiaries:
entertainment (NET), consumer products (CON), pharmaceuticals (PHA), and insurance (INS). The four subsidiaries are expected to perform differently, depending on the economic environment.AppendixLO1

Transcribed Image Text:

Investment Poor in $millions Economy Average Good Economy Economy ENT $1,200 +20% -5% -8% CON 800 +15 +10 -20 PHA 1,400 -10 -5 +27 INS 600 -10 +10 +10