- CFA Exams
- CFA Exam: Level I 2021
- Study Session 2. Quantitative Methods (1)
- Reading 8. Probability Concepts
- Subject 7. Covariance and Correlation

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**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

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**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 |