Between 1994 and 2004, the standard deviation of the returns for the S&P 500 and the NYSE indexes were 0.27 and 0.14, respectively, and the covariance of these index returns was 0.03. What was the correlation coefficient between the two market indicators?
A) 1.26
B) 0.7937
C) 0.2142
D) 0.1111
E) 0.44

Question

Quizplus · Accepted Answer

The correlation coefficient, denoted by ρ, is given by the formula:

ρ = covariance / (standard deviation of S&P 500) * (standard deviation of NYSE)

Plugging in the given values, we get:

ρ = 0.03 / (0.27 * 0.14) = 0.7937

Therefore, the correlation coefficient between the S&P 500 and NYSE indexes is 0.7937, which indicates a strong positive correlation between the two market indicators.

Between 1994 and 2004, the Standard Deviation of the Returns