The covariance between the returns of A and B is -0.112. The standard deviation of the rates of return is 0.26 for stock A and 0.81 for stock B. The correlation of the rates of return between A and B is the closest to ________.
A) -1.88
B) -0.53
C) 0.53
D) 1.88

Question

Quizplus · Accepted Answer

The formula for correlation is:

Correlation = Covariance / (Standard deviation of A * Standard deviation of B)

Substituting the given values:

Correlation = -0.112 / (0.26 * 0.81)

Correlation = -0.544

The closest choice to -0.544 is -0.53, which is option B.

The Covariance Between the Returns of a and B Is