Hi guys, Anyone can figure the intuition behind this question? Consider two stocks A and B. Assume their annual returns are jointly normally distributed, the marginal distribution of each stock has mean 2% and standard deviation 10%, and the correlation is 0.9. What is the expected annual return of stock A if the annual return of stock B is 3%? a. 2.9% b. 2% c. 1.1% d. 4.7% CORRECT: A E[ra | rb = x] = μa + (ρab σaσb/σa)(x – μb) = 0.02 + 0.9 * (0.03 – 0.02) = 0.029 Reference: Damodar Gujarati, chapter 2. Thanks and regards, jk

Hi Jiew, We discussed this question here: http://www.bionicturtle.com/forum/viewthread/4447/ ... let me know if that doesn't give an intuition? Thanks! David