Question

The standard deviation of return on investment A is .21, while the standard deviation of return on investment B is .16. If the covariance of returns on A and B is .006, the correlation coefficient between the returns on A and B is _________. .

a.179
b..006
c..179
d..006

Answer 1

the correlation coefficient is 0.1786

Step-by-step explanation:

To calculate the correlation coefficient between the returns of investments A and B we have to find the value of C in the following equation:

covariance of returns on A and B = correlation coefficient (we will call this C) x standard deviation A x standard deviation B

0.006 = C x 0.21 x 0.16 = 0.0336C

C = 0.006 / 0.0336 = 0.1786