Thread: covariance

Originally Posted by 0123

Sorry CaptainBlack. I need more help with the joint probability distribution. I am desperate. Seriously.

My table data are
Stock A price 45 50 55 60
Stock B price 40 50 60 70

p(45, 40)=P(50,50)=P(55,60)=P(60,70)

All the other possible combinations to fill in the joint probability table are= 0. 003333

To get the covariance, how do I do in this case, with numbers? I hope you will help me out, Captain.Thank you so much . Seriously.

We know that

covar(X,Y) =E(XY) - E(X)E(Y)

so we need only evaluate these expaectations.

The probabilities p(45,40), .. are derived from the requirement that all the
probabilities sum to 1.

The remaing calcs are shown in the attached image of the spreadsheet.

RonL

Thank you CaptainBlack. My problem is the result on the book is different. It says covariance= 59.17

But according to the calculations of excel
E(X*Y)=2946.66

and E(X)=53 and E(Y)= 55

So 2946.66- 53*55= 31.66

Originally Posted by 0123

Thank you CaptainBlack. My problem is the result on the book is different. It says covariance= 59.17

But according to the calculations of excel
E(X*Y)=2946.66

and E(X)=53 and E(Y)= 55

So 2946.66- 53*55= 31.66

Check your arithmetic; E(X)=52.5, E(Y)=55, and I get 59.1667 for the covariance

RonL

Originally Posted by CaptainBlack

Check your arithmetic; E(X)=52.5, E(Y)=55, and I get 59.1667 for the covariance

RonL

Thank you SO MUCH.