Thread starter
#1

Q. Consider 2 stocks, A and B / assume there annual returns are jointly normally distributed , the marginal distribution of each stock has mean 2% AND STD deviation 10%. And correlation is 0.9 . What is the expected annual return of the stock A if the annual return of stock B is 3%?

a. 2%

b. 2.9%

c. 4.7%

d. 1.1%

Answer: The info in this question can be used to construct a regression model of A and B. We have R(A)= 2% + .9(10%/10%) [R(B)-2%] + E

Next replacing R(B) by 3% gives R(A)=2% + .9(3%-2%)=2.9%

Please explain which formula is used to arrive at answer. I couldn't get it. Please.

a. 2%

b. 2.9%

c. 4.7%

d. 1.1%

Answer: The info in this question can be used to construct a regression model of A and B. We have R(A)= 2% + .9(10%/10%) [R(B)-2%] + E

Next replacing R(B) by 3% gives R(A)=2% + .9(3%-2%)=2.9%

Please explain which formula is used to arrive at answer. I couldn't get it. Please.

## Stay connected