Question

Horse Stock returns have exhibited a standard deviation of 0.57, whereas Mod T Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042.


What is the covariance of the returns?


A)0.028025


B)0.217327


C)0.3591007


D)0.993094

Answer 1

Answer: A)0.028025

Explanation:

Covariance measures thw relationship between 2 random variables by measuring the variations of two variables from their expected value.

When calculating covariance we use the following formula,

Cov (R1, R2) = p12*σ1*σ2

Where

p12 is the correlation coefficient

σ1 is the standard deviation of Variable 1

σ2 is the standard deviation of Variable 2.

Calculating then we have,

Cov (hs,mt) = 0.078042 * 0.57* 0.63

Cov (hs,mt) = 0.0280248822

Cov (hs,mt) = 0.028025

The covariance of the returns is 0.028025.