Financial Risk Manager Part 1

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Explanation:

A is correct.

Explanation: Let $J = \text{return on stock J}$ and $K = \text{return on stock K}$ . Note that $\text{Corr}(J,K) = \rho_{J,K} = \frac{\text{Cov}(J,K)}{\sigma_J \cdot \sigma_K}$ , which means that: $\text{Cov}(J,K) = \rho_{J,K} \cdot \sigma_J \cdot \sigma_K$

Given: $\text{Cov}(J,K) = 0.0054$ $\sigma_K = 0.11$ $\rho_{J,K} = 0.37$

Plugging in the values: $0.0054 = 0.37 \cdot \sigma_J \cdot 0.11$

Solving for $\sigma_J$ (standard deviation of stock J): $\sigma_J = \frac{0.0054}{0.37 \cdot 0.11} \approx 0.1327$

The variance of stock J, $\sigma_J^2$ , is obtained by squaring the standard deviation of stock J: $\sigma_J^2 = 0.1327^2 \approx 0.017609 \text{ or } 0.0176$

Explanation:

A is correct.

Given: $\text{Cov}(J,K) = 0.0054$ $\sigma_K = 0.11$ $\rho_{J,K} = 0.37$

Plugging in the values: $0.0054 = 0.37 \cdot \sigma_J \cdot 0.11$

Solving for $\sigma_J$ (standard deviation of stock J): $\sigma_J = \frac{0.0054}{0.37 \cdot 0.11} \approx 0.1327$

The variance of stock J, $\sigma_J^2$ , is obtained by squaring the standard deviation of stock J: $\sigma_J^2 = 0.1327^2 \approx 0.017609 \text{ or } 0.0176$

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A fund manager who follows a value-oriented investment strategy aims to identify stocks that are undervalued. Currently, the manager is evaluating the returns of two technology sector stocks, referred to as stock J and stock K. Through the assessment, the manager has determined the correlation coefficient between the returns of stock J and stock K to be 0.37, and the covariance of their returns to be 0.0054. Knowing that the standard deviation of the returns for stock K is 0.11, calculate the variance of the returns for stock J.

Exam-Like

0.0176

51.5%

0.0407

13.9%

0.0735

14.9%

0.1327

19.7%