### Compute the covariance

Assignment Help Finance Basics
##### Reference no: EM1361765

1) You are considering investing in two stocks, Pelts, Inc., that manufactures fur coats, and PITA, Inc., a for-profit animal-rights advocacy group. Pelts and PITA are perfectly negatively correlated. Pelts has variance of 0.09, while PITA's variance is 0.16.

a) What is the covariance between Pelts and PITA?
b) Consider a portfolio that consists of 57% Pelts and 43% PITA. What is the variance of this portfolio?
c) If the risk-free rate is 6%, the market risk premium is 6%, and PITA's expected return is 5%, what is Pelt's expected return in equilibrium?

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