Question

portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 18%, while stock B has a standard deviation of return of 24%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is 0.033, the correlation coefficient between the returns on A and B is _________.

Answer 1

Answer:

- 0.5844

Explanation:

Portfolio Variance can be calculated using the following formula:

σP2 = wA2 * σA2    +    wB2 * σB2    +   2* wA * wB * σA * σB * ρAB

Here

wA  is the percentage of stock A of the total portfolio which is 60%

σA is the standard deviation of Stock A which is 18%

wB is the percentage of stock A of the total portfolio which is 40%

σB is the standard deviation of Stock B which is 24%

σBσP is the variance return on the portfolio which is 0.033

And

ρAB is correlation coefficient between the returns on A and B which is to be calculated.

By putting values, we have:

0.033 = 60%^2 * 18%^2   +  40%^2  * 24%^2   +  2 * 60% * 40% * 18% * 24% * ρAB

ρAB = - 0.5844