Question

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 23%, while stock B has a standard deviation of return of 29%. Stock A comprises 70% of the portfolio, while stock B comprises 30% of the portfolio. If the variance of return on the portfolio is 0.042, the correlation coefficient between the returns on A and B is _________. Multiple Choice 0.088 0.304 0.213 0.091

Answer 1

0.304

Step-by-step explanation:

The calculation has been done step by step in order to understand the final result. Note that (p) in the below working refers to the correlation coefficient between Stock A and B.

0.042 = (0.70^2)(0.23^2) + (0.30^2)(0.29^2) + 2(0.70)(0.30)(0.23)(0.29)p

0.042 = 0.0259 + 0.0076 + 0.028p

0.042 = 0.0335 + 0.028p

0.042 - 0.0335 = 0.028p

0.0085 = 0.028p

p = 0.0085 / 0.028

p = 0.304