State of the Economy Recession Below Average Average Above Average Boom Mean Standard Deviation Coefficient of Variation Covariance with MP Correlation with Market Index Beta CAPM Req. Return Valuation (Overvalued/Undervalued/Fairly Valued) Nature of stock (Aggressive/Defensive) Probability 0.2 0.1 0.3 0.3 0.1 % Return on T-Bills, Stocks and Market Index T- Bills 7 7 7 7 7 Phillips -22 -2 20 35 50 Pay-Rubber- made 10 -10 7 45 30 up 28 14.7 0 -10 -20 Market Index -13 1 15 29 43

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Question

Consider the following information about the various states of economy and the returns of
various investment alternatives for each scenario. Answer the questions that follow.

 

State of the Economy
Recession
Below Average
Average
Above Average
Boom
Mean
Standard Deviation
Coefficient of Variation
Covariance with MP
Correlation with Market Index
Beta
CAPM Req. Return
Valuation
(Overvalued/Undervalued/Fairly
Valued)
Nature of stock
(Aggressive/Defensive)
Probability
0.2
0.1
0.3
0.3
0.1
% Return on T-Bills, Stocks and Market
Index
T-
Bills
7
7
7
7
7
Phillips
-22
-2
20
35
50
Pay- Rubber-
made
10
-10
7
45
30
up
28
14.7
0
-10
-20
Market
Index
-13
1
15
29
43
Transcribed Image Text:State of the Economy Recession Below Average Average Above Average Boom Mean Standard Deviation Coefficient of Variation Covariance with MP Correlation with Market Index Beta CAPM Req. Return Valuation (Overvalued/Undervalued/Fairly Valued) Nature of stock (Aggressive/Defensive) Probability 0.2 0.1 0.3 0.3 0.1 % Return on T-Bills, Stocks and Market Index T- Bills 7 7 7 7 7 Phillips -22 -2 20 35 50 Pay- Rubber- made 10 -10 7 45 30 up 28 14.7 0 -10 -20 Market Index -13 1 15 29 43
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can you show how to calculate the correlation with the market index with out excel 

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Can you explain, when calculating the mean why the probability is included in the calculation? eg when you're using excel:  (0.2*7) + (0.1*7) + (0.3*7) + (0.3*7) + (0.1*7) = 7%

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