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Question 10B

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1 Question 10B on Fri Aug 05, 2011 6:59 am

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Company A - Expected Value


Company A - Variance and Standard Deviation


Company B - Expected Value


Company B - Variance and Standard Deviation


Correlation between the two companies.








Covariance is the sum of the (Difference * Probability) for each state:


Correlation Coefficient can then be caluclated by dividing the covaraince by the product of the standard deviation for Company A and standard deviation for Company B.






In summary there is a weak-to-strong positive correlation between expected value for Company A and expected value for company B.

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2 Re: Question 10B on Fri Aug 05, 2011 7:07 am

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Things to look out for

1. The question asks for Expected Value. Therefore the number for "Return" represents a monetary value and NOT a percentage. So it would be wrong to change a return of 4 to 0.04 when calculating Expected Value.

2. You don't need to find an average by dividing by 6, an average is calculated by multiplying by probability.

3. I can't find anywhere in the notes where Covariance and Correlation Coefficient are calculated.

4. I can't find anywhere in the notes where point 1. is explained.

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3 Re: Question 10B on Mon Aug 08, 2011 11:51 pm

but, the standard deviation is 18, not 18%..if you put % it should become 1800%. I knew that the s.d. is not in percentage..

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4 Re: Question 10B on Tue Aug 09, 2011 12:37 am

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I think I've made an error here. Standard Deviation is not a percentage. That would make more sense?

It was a % when I thought we had to find Expected Return, but we have to find Expected Value - which means Standard Deviation is not a %?

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5 Re: Question 10B on Tue Aug 09, 2011 12:59 am

i think that we are calculating the variance with the expected value (in $), so the standard deviation should be in $..

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6 Re: Question 10B on Tue Aug 09, 2011 1:18 am

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ok. But I don't think that changes my working. Just means it is wrong for me to state the answer as a %, I should state it in $?

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7 Re: Question 10B on Tue Aug 09, 2011 1:23 am

nono, it doesn't change anything Very Happy

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8 Re: Question 10B on Tue Aug 09, 2011 1:26 am

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Good find though. I appreciate it. Will make the change when I get home and make corrections to this thread.

Thanks again.

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9 Re: Question 10B on Tue Aug 09, 2011 5:41 am

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This should now be corrected in this thread and also in the final for download. Thanks lele.

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