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In Cooltown there are 3 states of the economy: not bad, good and totally awesome. There are two stocks with returns in each state as
In Cooltown there are 3 states of the economy: "not bad," "good" and "totally awesome." There are two stocks with returns in each state as follows: State Likelihood Stock 1 return Stock 2 return 6% 1/4 2% Not Bad Good 1/2 5% 15% Totally Awesome 1/4 16% 48% Answer the following questions (clearly label the parts in your typed response): 1. What is the correlation between stock 1 returns and stock 2 returns? (Hint #1: You do not need to do a brute force calculation here. Hint #2: Look at the ratio of Stock 2 returns to Stock 1 returns. Hint #3: draw a plot of Stock 2 returns against Stock 1 returns. ] (2 points)
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