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If the covariance between two stocks is 116% and the standard deviation of both stocks are...

If the covariance between two stocks is 116% and the standard deviation of both stocks are 24% and -10% respectively, what is the Correlation Coefficient between the two stocks? SHOW ALL THE STEPS PLEASE

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Answer #1

The correlation coefficient, or simply, correlation between two stocks say i and j is calculated as:
Correlation(Ri,Rj)=Covariance(Ri,Rj)/Standard deviation(Ri)*Standard deviation(Rj)
Correlation(Ri,Rj) means the correlation between the returns on stock i and j respectively
Covariance(Ri,Rj) means the covariance between the returns on stock i and j respectively
Standard deviation(Ri) means standard deviation in the returns of stock i
Standard deviation(Rj) means standard deviation in the returns of stock j

Note: The value of correlation coefficient lies in a range of +1 to -1.

Given that:
Covariance between two stocks is 116%
Standard deviation of both stocks are 24% and -10% respectively.
So, correlation coefficient=116%/(24%)*(-10%)
=1.16/.24*(-.1)=-0.483

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