Question 1
Multiple ChoiceStock A Stock B
E(R) 0.07 0.11
\sigma^{2} 0.0036 0.0025
COV_{A,B} =0.002
The correlation between the returns of Stock A and Stock B is closest to:
Explanation
To calculate the correlation coefficient, use the formula:
ρ = Cov(X,Y) / (σX × σY)
σX = √0.0036 = 0.06
σY = √0.0025 = 0.05
So,
ρ = 0.002 / (0.06 × 0.05) = 0.002 / 0.003 = 0.67