Security X has expected return of 14% and standard deviation of 22%. Security Y has expected return of 16% and standard deviation of 28%. If the two securities have a correlation coefficient of 0.8, what is their covariance?
A) 0.038
B) 0.049
C) 0.018
D) 0.013
E) 0.054

Question

Quizplus · Accepted Answer

The covariance between two securities 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. Plugging in the given values: Cov(X,Y) = 0.8 * 0.22 * 0.28 = 0.04912, which rounds to 0.049.

Security X Has Expected Return of 14% and Standard Deviation