Page 61 - FINAL CFA SLIDES DECEMBER 2018 DAY 3

Session Unit 2:
9. Probability Concepts (B/C/A/B/A)

A. (0.4)(–0.1) + (0.3)(0.1) + (0.3)(0.3) = 0.08
i

C. ER of Stock B = (0.4)(0.5) + (0.3)(0.2) + (0.3)(–0.3) = 0.17

Var(RB) = 0.4(0.5 – 0.17)2 + 0.3(0.2 – 0.17)2 + 0.3(–0.3 – 0.17)2 = 0.1101
Standard deviation = √0.1101 = 0.3318

A. E(RA) = 0.08 (from #2 above); Var(RA) = 0.4(–0.1 – 0.08)2 + 0.3(0.1 – 0.08)2 + 0.3(0.3 – 0.08)2 = 0.0276

B. Cov(RA,RB) = 0.4(–0.1 – 0.08)(0.5 – 0.17) + 0.3(0.1 – 0.08)(0.2 – 0.17) + 0.3(0.3 – 0.08)( –0.3 – 0.17) = –0.0546

A. Corr(RA,RB) = Cov(RA,RB) / σ(RA)σ(RB) = = –0.0546 (from #5 above) | Var(RA) = 0.0276 (from #4 above);

σ(RA) = √0.0276 = 0.1661 ; σ(RB) = 0.3318 (from #3 above)
Corr(RA,RB) = –0.0546 / (0.1661)(0.3318) = –0.9907