Between 1980 and 2000, the standard deviation of the returns for the NIKKEI and the DJIA indexes were 0.08 and 0.10, respectively, and the covariance of these index returns was 0.0007. What was the correlation coefficient between the two market indicators?
A) .0906
B) .0985
C) .0796
D) .0875
E) .0654

Question

Quizplus · Accepted Answer

The correlation coefficient between the two market indicators can be calculated using the formula:

Correlation = Covariance / (Standard deviation of NIKKEI returns * Standard deviation of DJIA returns)

Substituting the given values, we get:

Correlation = 0.0007 / (0.08 * 0.10) = 0.0875

Therefore, the correlation coefficient between the NIKKEI and DJIA indexes is 0.0875 or 8.75%. The closest option is (D) 0.0875.

Between 1980 and 2000, the Standard Deviation of the Returns