Explanation:
The formula relating covariance, correlation, and standard deviation is: Covariance(UUK, LLY) = Correlation(UUK, LLY) * StdDev(UUK) * StdDev(LLY) Given: Covariance = 0.032 Correlation = 0.72 StdDev(LLY) = 0.17
0.032 = 0.72 * StdDev(UUK) * 0.17 0.032 = 0.1224 * StdDev(UUK) StdDev(UUK) = 0.032 / 0.1224 = 0.261438
The variance is the square of the standard deviation: Variance(UUK) = (0.261438)^2 = 0.06835
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Q.10 A retail investor has recently bought two stocks – UUK and LLY – which have a correlation of 0.72. The covariance between UUK and LLY is 0.032. Given that LLY’s return has a standard deviation of 0.17, the variance of returns for UUK is closest to:
A
0.13
B
0.06835
C
0.0385
D
0.0148