## Answers

Stock X | Stock Y | ||||

Year | Stock X | Stock Y | Return - Average | Return - Average | Product of (Return - Average)Stock X*Stock Y |

1 | 0.08 | -0.16 | 0.0275 | -0.1625 | -0.00446875 |

2 | -0.05 | 0.12 | -0.1025 | 0.1175 | -0.01204375 |

3 | 0.14 | 0 | 0.0875 | -0.0025 | -0.00021875 |

4 | 0.04 | 0.05 | -0.0125 | 0.0475 | -0.00059375 |

Average | 0.0525 | 0.0025 | SUM | -0.01732500 | |

The sum of the product of (Return - Average)StockX*StockY = -.017325 | |||||

Covariance = -.017325/n-1 | |||||

where n is the number of years | |||||

Covariance = -.017325/3 | |||||

Covariance = -.005780 | |||||

The covariance of the returns of stock X with the returns of stock Y = -.005780 |

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