Security X has expected return of 7% and standard deviation of 14%. Security Y has expected return of 11% and standard deviation of 22%. If the two securities have a correlation coefficient of −0.45, what is their covariance?
A) 0.0388
B) −0.0108
C) 0.0184
D) −0.0139
E) −0.1512

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) = -0.45 * 14% * 22% = -0.45 * 0.14 * 0.22 = -0.01386, which rounds to -0.0139.

Security X Has Expected Return of 7% and Standard Deviation