Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \
1 & 0.15 & 8 \% & 8 \% \
2 & 0.20 & 13\% & 7\% \
3 & 0.15 & 12\%& 6\% \
4 & 0.30 & 14\%& 9\% \
5 & 0.20 & 16\% & 11 \%
\end{array}$

The coefficient of correlation between A and B is
A) 0.474.
B) 0.612.
C) 0.590.
D) 1.206.

Question

Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \
1 & 0.15 & 8 \% & 8 \% \
2 & 0.20 & 13\% & 7\% \
3 & 0.15 & 12\%& 6\% \
4 & 0.30 & 14\%& 9\% \
5 & 0.20 & 16\% & 11 \%
\end{array}$

The coefficient of correlation between A and B is
A) 0.474.
B) 0.612.
C) 0.590.
D) 1.206.

Quizplus · Accepted Answer

The coefficient of correlation is calculated using the covariance of returns and the standard deviations of the returns of stocks A and B. After calculating these values, the correlation coefficient is found to be approximately 0.590.

Consider the Following Probability Distribution for Stocks a and B