CFA Practice Question

There are 410 practice questions for this study session.

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)?

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
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