Shares in Sergeant Pepper will earn a return of 5.50% during a bull market, and 4.80% during a bear market. Shares in AbbeyRoad will earn a return of 8.10% during a bull market, and 1.90% during a bear market. Over the next year, there is a 77% chance of a bull market, otherwise it will be a bear market. What is the covariance of the two security returns? O 0.003640 O 0.000077 O 0.000101 O 0.000433

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Shares in Sergeant Pepper will earn a return of 5.50% during a bull market, and 4.80% during a bear market. Shares in Abbey Road will earn a return of 8.10% during a bull market, and 1.90% during a bear market. Over the next year, there is a 77% chance of a bull market, otherwise it will be a bear
market. What is the covariance of the two security returns?
0.003640
0.000077
O -0.000101
O 0.000433
Transcribed Image Text:Shares in Sergeant Pepper will earn a return of 5.50% during a bull market, and 4.80% during a bear market. Shares in Abbey Road will earn a return of 8.10% during a bull market, and 1.90% during a bear market. Over the next year, there is a 77% chance of a bull market, otherwise it will be a bear market. What is the covariance of the two security returns? 0.003640 0.000077 O -0.000101 O 0.000433
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Covariance measures the relationship between two variables and to what extent they are related to each other. This variance can be positive or negative. A positive variance means they will change in same direction while a negative variance means they will change in opposite directions.

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