Question

he W Equity portfolio has a standard deviation of returns of 8. The R Bond portfolio...

he W Equity portfolio has a standard deviation of returns of 8. The R Bond portfolio has a standard deviation of returns of 6. If the Covariance of these portfolio is 5 what is this portfolio's coefficient of correlation?

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Answer #1

Solution:

The formula for calculating the coefficient of correlation of a portfolio is

ρ WR= COVWR/ (σW* σR)

Where            

ρ WR = Coefficient of correlation of a portfolio

COVWR = Covariance between Portfolio W & Portfolio R

σW = Standard Deviation of Returns of Equity Portfolio W

σR = Standard Deviation of Returns of Bond Portfolio R

As per the information given in the question we have

COVWR = 5   ;      σW =   8    ;    σR =   6

Applying the above values in the formula we have

= 5 / (8 * 6 )

= 5 /48

= 0.1042 ( when rounded off to four decimal places )

= 0.10 ( when rounded off to two decimal places )

Thus the portfolio's coefficient of correlation = 0.1042

= 0.10 ( when rounded off to two decimal places )

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