The covariance of the returns between Wildcat Stock and Sun Devil Stock is 0.09875. The variance of Wildcat is 0.2116, and the variance of Sun Devil is 0.1369. What is the correlation coefficient between the returns of the two stocks?

Question

Quizplus · Accepted Answer

The formula for correlation coefficient is:
Correlation Coefficient = Covariance / (Standard Deviation of Stock1 x Standard Deviation of Stock2)

We first need to calculate the standard deviation of both stocks:
Standard Deviation of Wildcat = √Variance of Wildcat = √0.2116 = 0.4600
Standard Deviation of Sun Devil = √Variance of Sun Devil = √0.1369 = 0.3700

Now we can substitute the given values in the formula of correlation coefficient:
Correlation Coefficient = 0.09875 / (0.4600 x 0.3700) = 0.578731

Therefore, the best choice is D, with a correlation coefficient of 0.578731.

The Covariance of the Returns Between Wildcat Stock and Sun