question archive The covariance of the returns between Willow Stock and Sky Diamond Stock is 0
The covariance of the returns between Willow Stock and Sky Diamond Stock is 0
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The covariance of the returns between Willow Stock and Sky Diamond Stock is 0.0820. The variance of Willow is 0.1130, and the variance of Sky Diamond is 0.1470. What is the correlation coefficient between the returns of the two stocks?
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0.6362 or 0.636 or 0.64 or 0.6
Step-by-step explanation
| Step-1:Calculation of standard deviation of the two stocks | |||||||
| Standard deviation of first stock | = | Variance | ^ | (1/2) | |||
| = | 0.1130 | ^ | (1/2) | ||||
| = | 0.3361547 | ||||||
| Standard deviation of second stock | = | Variance | ^ | (1/2) | |||
| = | 0.1470 | ^ | (1/2) | ||||
| = | 0.3834058 | ||||||
| Step-2:Calculation of correlation coefficient | |||||||
| Correlation coefficient | = | Covariance of two stocks | / | (Standard deviation of stock one * Standard deviation of stock Two) | |||
| = | 0.0820 | / | (0.3361547*0.3834058) | ||||
| = | 0.0820 | / | 0.1288836617 | ||||
| = | 0.6362 | ||||||
