Security X has expected return of 12% and standard deviation of 18%. Security Y has expected return of 15% and standard deviation of 26%. If the two securities have a correlation coefficient of 0.7, what is their covariance?
A) 0.038
B) 0.070
C) 0.018
D) 0.033
E) 0.054

Question

Quizplus · Accepted Answer

Covariance is calculated using the formula: Cov(X,Y) = ρ(X,Y) * σX * σY, where ρ(X,Y) is the correlation coefficient between X and Y, σX is the standard deviation of X, and σY is the standard deviation of Y. Substituting the given values: Cov(X,Y) = 0.7 * 0.18 * 0.26 = 0.03276, which rounds to 0.033.

Security X Has Expected Return of 12% and Standard Deviation