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%
- 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:
Corr(R_A, R_B) = Cov(R_A, R_B) / (σ_A * σ_B)
Where:
- Cov(R_A, R_B) = 0.315
- σ_A = √(Variance of Portfolio A) = √0.525 ≈ 0.7246
- σ_B = √(Variance of Portfolio B) = √0.63 ≈ 0.7937
Calculation: Corr(R_A, R_B) = 0.315 / (0.7246 * 0.7937) = 0.315 / 0.5751 ≈ 0.5477
Therefore, the correlation between the two portfolios is 0.5477.
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