The standard deviation of return on investment A is 25%, while the standard deviation of return on investment

The standard deviation of return on investment A is 25%, while the standard deviation of return on investment B is 20%. If the correlation coefficient between the returns on A and B is −0.260, the covariance of returns on A and B is . Multiple Choice –0.2080 –0.0130 0.0130 0.2080

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  1. –0.0130

    Explanation:

    Correlation given the variance and the standard deviation of the two returns can be calculated by;

    Correlation coefficient = Covariance of returns on investment A and B / (Standard deviation of return on investment A * Standard deviation of return on investment B).

    Rearranging the formula, Covariance becomes;

    Covariance of returns on investment A and B = Correlation coefficient * (Standard deviation of return on investment A * Standard deviation of return on investment B)

    Covariance of returns on investment A and B = -0.260 * 0.25 * 0.20

    Covariance of returns on investment A and B  = –0.0130

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