"quantity"exercise:Expected return on securities

A is correct. First calculate the expected returns on securities A and B with the formula:

Expected return on security A = 0.6 × 25% + 0.4 × 20% = 15% + 8% = 23%

Expected return on security B = 0.6 × 30% + 0.4 × 20% = 18% + 8% = 26%

Then calculate the covariance of returns between securities A and B with the formula:

B is incorrect. In the covariance calculation, it uses the joint probabilities in the wrong positions:

【analysis】

A is incorrect; it is calculated as (10 – 4)!/4! = 6!/4! = 30.

B is incorrect; it is calculated as a combination: 10!/[(10 – 4)! × (4!)] = 10!/(6! × 4!) = 210.