Consider the Following Historical Data for the Returns on Assets

question 21

Essay

Consider the following historical data for the returns on assets A and B and the market portfolio:
$\begin{array}{|c|c|c|c|}\hline \text { Period } & \text { Asset A } & \text { Asset B } & \text { Market Portfolio } \\\hline 1 & 10 \% & 6 \% & 4 \% \\\hline 2 & 3 \% & 6 \% & 1 \% \\\hline 3 & 5 \% & 2 \% & 5 \% \\\hline 4 & 2 \% & 4 \% & 2 \% \\\hline 5 & 1 \% & 2 \% & 1 \% \\\hline\end{array}$

a. What is the covariance between asset A and asset B?
b. If the beta of asset B is 0.5, what is the systematic return and non-systematic return for asset B in each period?

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Definitions:

Classical Self-Correction Mechanism

A theory suggesting that free markets are capable of automatically adjusting to and correcting economic imbalances.

Recessions

A temporary downturn in the economy marked by decreased trade and industrial activities, typically recognized by a decline in Gross Domestic Product (GDP) for two consecutive quarters.

Keynesian Analysis

An economic approach that emphasizes the role government can play in smoothing out the fluctuations in the economy through fiscal and monetary policy.

Macroeconomic Equilibrium

A state in which aggregate supply equals aggregate demand, meaning all goods and services produced are purchased, without any involuntary inventory buildup.