Financial Risk Manager Part 1

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

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NNikitesh

Last updated: February 2, 2026 at 10:22

0.155.

0.1865.

0.1119.

0.2133

Explanation:

Explanation

The correlation coefficient formula is:

$\text{Corr}(R_X, R_Y) = \frac{\text{Cov}(R_X, R_Y)}{\sigma_X \cdot \sigma_Y}$

Given:

Cov(R_X, R_Y) = 0.093
Variance of R_X = 0.69
Variance of R_Y = 0.36

First, calculate the standard deviations: $\sigma_X = \sqrt{0.69} = 0.830662$ $\sigma_Y = \sqrt{0.36} = 0.6$

Now calculate the correlation: $\text{Corr}(R_X, R_Y) = \frac{0.093}{0.830662 \times 0.6} = \frac{0.093}{0.4983972} = 0.1865$

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

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