Financial Risk Manager Part 1
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What is the correlation of returns between these two portfolios?
- Portfolio A's variance of returns: 52.5%
- Portfolio B's variance of returns: 63%
- The covariance of return between the two portfolios: 0.315
Other
Community
NNikitesh
A
0.8257
B
0.0011
C
0.5477
D
0.9524
Explanation:
The correlation coefficient is calculated using the formula:
Where:
- Covariance = 0.315
- Standard deviation of Portfolio A = √(0.525) = √(0.525) ≈ 0.7246
- Standard deviation of Portfolio B = √(0.63) = √(0.63) ≈ 0.7937
Calculation:
Key points:
- Variance must be converted to standard deviation by taking the square root
- Correlation coefficient ranges from -1 to +1
- The covariance of 0.315 is positive, indicating positive correlation
- The result of 0.5477 shows a moderate positive correlation between the two portfolios
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