- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 5. Portfolio Mathematics
- Subject 1. Portfolio Expected Value and Variance of Return
CFA Practice Question
It is forecasted that the expected EPS for two stocks, X and Y, is $8.95 and $5. The covariance for the earnings per share for the two stocks is -32.3. What is the value for E(XY)?
B. 12.45
C. 18.35
A. -18.35
B. 12.45
C. 18.35
Correct Answer: B
Cov(X, Y) = E(XY) - E(X) x E(Y) = E(XY) - 8.95 x 5 = -32.3 ==> E(XY) = 12.45
User Contributed Comments 7
| User | Comment |
|---|---|
| stevelaz | Could someone explain this? |
| BayAreaPablo | 1) Cov(X,Y)=E(XY)-E(X)-E(Y) 2) We know: Cov (X,Y)=-32.3 E(X)= 8.95 E(Y)=5 E(XY)=? 3) Plug into equation 1) and solve for E(XY) -32.3=E(XY)-8.95x5 -32.3=E(XY)-44.75 12.45=E(XY) |
| joe3 | I feel stevelaz means how could you get the formula: Cov(X,Y)=E(XY)-E(X)xE(Y) Anybody can help? |
| viannie | Cov => joint probability. So, E(X) * E(Y) but exclude E(XY) .. therefore Cov(X,Y) = E(XY) - E(X)*E(Y) I got it as I recognize the formula as a Joint probability. Someone please confirm though...thanks! |
| ThanhBUI | By definition: Cov(XY)=E[(X-E(X))(Y-E(Y))] =E[XY-YE(X)-XE(Y)+E(X)E(Y)] =E(XY)-E(X)E(Y)-E(Y)E(X)+E(X)E(Y) =E(XY)-E(X)E(Y) Note: E(constant*R)=constant*E(R) |
| bc9115a | Nice one ThanhBUI |
| forry9er | This is an algebra problem ... not nice |