Question

The standard deviation of return on investment A is .20 while the standard deviation of return...

The standard deviation of return on investment A is .20 while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is __________.

A. .12

B. .28

C. .30

D. .75

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Answer #1

Correlation between stock A and B is calculated using the below formula:

Correlation between stock A and B= Covariance between stock A and B/ Standard deviation of stock A* Standard deviation of stock B

Correlation between stock A and B= 0.0030/ 0.20*0.05

                                                        = 0.0030/ 0.01

  = 0.30.

Therefore, the correlation coefficient between the returns of stock A and B is 0.30.

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