Between 1975 and 1985, the standard deviation of the returns for the NYSE and the S&P 500 indexes were 0.06 and 0.07, respectively, and the covariance of these index returns was 0.0008. What was the correlation coefficient between the two market indicators?
A) .1525
B) .1388
C) .1458
D) .1622
E) .1064

Question

Quizplus · Accepted Answer

The correlation coefficient between NYSE and S&P 500 can be calculated using the formula:

Correlation = Covariance / (Standard deviation of NYSE returns x Standard deviation of S&P 500 returns)

Substituting the given values, we get:

Correlation = 0.0008 / (0.06 x 0.07)
Correlation = 0.1905 / 4.2
Correlation = 0.04536

Therefore, the correlation coefficient is 0.04536. However, we need to round it to four decimal places as per the given options.

The closest option to 0.04536 after rounding to four decimal places is C) .1458.

Between 1975 and 1985, the Standard Deviation of the Returns