Answer: 0.0338.

## Explanation To calculate the covariance between two stocks given their variances and correlation coefficient, we use the formula: **Covariance = Correlation coefficient × (Standard deviation of Stock 1) × (Standard deviation of Stock 2)** Where: - Standard deviation = √Variance **Step 1: Calculate standard deviations** - Standard deviation of Stock 1 = √0.0625 = 0.25 - Standard deviation of Stock 2 = √0.0900 = 0.30 **Step 2: Calculate covariance** Covariance = 0.4500 × 0.25 × 0.30 Covariance = 0.4500 × 0.075 Covariance = 0.03375 ≈ 0.0338 **Step 3: Verify the calculation** - 0.25 × 0.30 = 0.075 - 0.4500 × 0.075 = 0.03375 - Rounded to four decimal places: 0.0338 **Why the other options are incorrect:** - **A. 0.0025**: This is too small and might result from incorrectly using the variances directly without taking square roots. - **C. 0.0675**: This is approximately double the correct answer and might result from forgetting to multiply by the correlation coefficient or using incorrect standard deviations. **Key Concept**: The covariance formula shows how two variables move together, scaled by their individual volatilities (standard deviations) and their linear relationship (correlation coefficient).

Author: LeetQuiz .