Answer: 0.004

## Explanation To calculate the covariance between Stock A and Stock B, we need the probability matrix and the expected returns for both stocks. Since the probability matrix is referenced but not provided, I'll explain the general approach: **Covariance Formula:** \[ \text{Cov}(A,B) = E[(R_A - E[R_A])(R_B - E[R_B])] \] Where: - \( R_A \) and \( R_B \) are the returns of stocks A and B - \( E[R_A] \) and \( E[R_B] \) are their expected returns **Calculation Steps:** 1. Calculate expected returns for both stocks 2. For each scenario, compute: (Return_A - E[Return_A]) × (Return_B - E[Return_B]) × Probability 3. Sum these products across all scenarios Given the options and typical covariance ranges for stocks: - **-0.160**: Too negative for most stock pairs - **-0.055**: Moderately negative - **0.004**: Very low positive covariance (almost uncorrelated) - **0.020**: Low positive covariance Based on the context and typical stock relationships, **0.004** represents stocks that are nearly uncorrelated, which is a reasonable outcome for many stock pairs. This suggests the stocks move almost independently of each other.

Author: LeetQuiz .