Financial Risk Manager Part 1

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Assuming that the covariance of returns of Stock X and Stock Y is Cov(Rx, Ry) = 0.093, the variance of Rx = 0.69, and the variance of Ry = 0.36, the correlation of returns of Stock X and Stock Y is closest to:

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TTanishq

0.155

0.1865

0.1119

0.2133

Explanation:

The correlation coefficient is calculated using the formula:

$\text{Corr}(R_x, R_y) = \frac{\text{Cov}(R_x, R_y)}{\sigma(R_x)\sigma(R_y)}$

First, we need to find the standard deviations from the variances:

$\sigma(R_x) = \sqrt{0.69} = 0.8306$
$\sigma(R_y) = \sqrt{0.36} = 0.6$

Now plug into the correlation formula:

$\text{Corr}(R_x, R_y) = \frac{0.093}{0.8306 \times 0.6} = \frac{0.093}{0.49836} = 0.1865$

Therefore, the correlation coefficient is 0.1865, which corresponds to option B.

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