The covariance between the returns of stock A and stock B is -125. The standard deviation of the rates of return is 20 for stock A and 10 for stock B. The correlation coefficient of the rates of return between A and B is closest to ________.
A) -0.625
B) -0.375
C) 0.375
D) 0.625

Question

Quizplus · Accepted Answer

The correlation coefficient (denoted by ρ) between two stocks A and B can be calculated using the formula:

ρ = cov(A,B) / (σA * σB)

Where cov(A,B) is the covariance between the two stocks, σA is the standard deviation of the rate of return of stock A, and σB is the standard deviation of the rate of return of stock B.

Substituting the given values, we get:

ρ = -125 / (20 * 10) = -0.625

Therefore, the closest answer option is A) -0.625.

The Covariance Between the Returns of Stock a and Stock