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3.0 (information for exercises of 3) Tourism continues to fuel the unprecedented boom of the Crater Island economy. Hence, the introduction of the Crater Island
3.0 (information for exercises of 3) Tourism continues to fuel the unprecedented boom of the Crater Island economy. Hence, the introduction of the Crater Island National Stock Exchange (CINSE) comes with the territory. Pacific Pineapple (stock A) and Pearl Real Estate (stock B) are the first traded securities. Barack considers investing in both companies and comes up with the following return estimates after a thorough analysis and consulting Jacob, his broker at Skylnvest. According to their estimation, three future states of nature seem possible. The following table shows the return profile of both assets for all three states: . Probability Return of stock A Retum of stock B State 1 0.55 0.12 0.15 State 2 0.35 -0.04 0.22 State 3 0.10 0.07 -0.17 Further calculations reveal that the expected return of stock A is 0.0590. Its variance is 0.005489 and its volatility equals 0.074088. 3.1 (8 Points) Calculate the expected return of an investment in stock B (Hg). Also determine the variance of stock's B return (0,?) as well as the covariance (COVA,B) and Pearson coefficient (corra,b) of stocks A and B
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