Assume a portfolio is comprised of two securities,A and B,whose standard deviations are 0.0412 and 0.0721,respectively.If their covariance is 0.002,what is their coefficient of correlation?
A)0.005
B)0.115
C)0.673
D)1.485

Question

Quizplus · Accepted Answer

The coefficient of correlation between securities A and B is given by the formula:

ρ = Cov(A,B) / (σ(A) * σ(B))

Where Cov(A,B) is the covariance between A and B, σ(A) is the standard deviation of A, and σ(B) is the standard deviation of B. Substituting the given values, we get:

ρ = 0.002 / (0.0412 * 0.0721) = 0.673

Therefore, the coefficient of correlation between A and B is 0.673, which is closest to choice C.

Assume a Portfolio Is Comprised of Two Securities,A and B,whose