Security X has expected return of 9% and standard deviation of 18%. Security Y has expected return of 12% and standard deviation of 21%. If the two securities have a correlation coefficient of −0.4, what is their covariance?
A) 0.0388
B) 0.0706
C) 0.0184
D) −0.0133
E) −0.0151

Question

Quizplus · Accepted Answer

The covariance between two securities can be calculated using the formula: Cov(X,Y) = ρ(X,Y) * σX * σY, where ρ(X,Y) is the correlation coefficient between securities 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) = -0.4 * 0.18 * 0.21 = -0.01512, which rounds to -0.0151.

Security X Has Expected Return of 9% and Standard Deviation