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April 2013 (CAPM) 4(iii)

J

Jia Syuen

Very Active Member
According to the examiner report, Cov(R_A,R_M)=0.25*3*3+0.5*5*5.1+0.25*7*5.2-5*4.6=1.1%

May I know what formula should I use to get this answer? Where does the '3,5.1,5.2' come from? Thank you in advance.
 
Hi
From the definition of covariance we have:
Cov(R_A,R_M) = E[R_A * R_M] - E[R_A]*E[R_M]
So the values of 3, 5.1 and 5.2 come from the three possible outcomes for R_M. These were calculated in part (i) of the question.
Steve
 
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