Question
Consider two assets: Core and More. Next year, 2021, there are 4 possible globally important scenarios: a. World War III -Global economy already reeling from
Consider two assets: Core and More. Next year, 2021, there are 4 possible globally important scenarios:
a. World War III -Global economy already reeling from the pandemic comes to a grinding halt. Assume that there is 20% chance that this may happen. b. Corona Over In January, a potent and effective cure for Corona is discovered and the pandemic is over, with cities, countries, borders and trade slowly picking up again and life returns to normal by Spring. Assume that there is 40% chance that this may happen c. Same old The pandemic continues till Summer; markets keep on performing as they have in 2020. Assume that there is 30% chance that this may happen d. Alls well By Thanksgiving 2020, the pandemic is over, and life returns to normal by Christmas 2020. Assume that there is 10% chance that this may happen
Use the return information below:
Scenario | Core Return | More Return |
WWIII | -20% | 1% |
Corona Over | 10% | 15% |
Same Old | 7.5% | -3% |
All's Well | 10% | 20% |
Calculate the following: a) Calculate the expected return of each asset b) Calculate the variance and volatility of each asset c) Calculate the covariance and correlation of returns between the assets
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