Consider the information below relating to the monthly rates of return for two companies X and Y over a period of 4 months:

                                                                 

Y

                                       xRate of return        

          yRate of Return

Date

Month 1

-4.76

-4.75

Month 2

5.34

7.65

Month 3

12.09

6.98

Month 4

-2.98

9.65

Calculate the covariance per month between the two companies. Show all your working. If a firm increases its financial risk by selling a large bond issue that increases its financial leverage explain this assumption? Also what is the relationship between risk and return. Explain with examples.

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