The correlation coefficient is calculated using the formula:

$\rho_{X,Z} = \frac{\text{Covariance}(X,Z)}{\sigma_X \cdot \sigma_Z}$

Given:

• Standard deviation of X = $0.1225^{1/2} = 0.35$
• Standard deviation of Z = $0.3721^{1/2} = 0.61$
• Covariance(X,Z) = 0.19

Calculation: $\rho_{X,Z} = \frac{0.19}{0.35 \times 0.61} = \frac{0.19}{0.2135} = 0.8899$

Key Points:

• The correlation coefficient measures the linear relationship between two variables
• It ranges from -1 to +1
• A value of 0.8899 indicates a strong positive correlation between Assets X and Z
• Note that correlation coefficient does not consider the weights of the assets