Question

The variance of stock a is .005, the variance of the market is .008 and the covariance between the two is .0026. what is the correlation coefficient?

Answer 1

Correlation coefficient formula = Covariance between Stock A and market / Standard deviation of stock * standard deviation of market

Covariance between stock and market = 0.0026

Standard deviation of stock A = square root of variance = square root of (0.005) = 0.07071

Standard deviation of market = square root of (0.008) = 0.08944

Correlation coefficient = 0.0026 / (0.07071 * 0.08944) = 0.4111

Answer is 0.4111