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RoseWind [281]
3 years ago
7

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 19%, while stock B has a standard

deviation of return of 25%. Stock A comprises 70% of the portfolio, while stock B comprises 30% of the portfolio. If the variance of return on the portfolio is 0.034, the correlation coefficient between the returns on A and B is _________.
Business
1 answer:
tangare [24]3 years ago
3 0

Correlation coefficent =  0.5356

<u>Explanation:</u>

Portfolio variance = (Standard of stock A * Weightage of stock A)2 + (Standard of stock B * Weightage of stock B)2 + 2 * (Standard of stock A * Weightage of stock A) * (Standard of stock B * Weightage of stock B) * Correlation coefficent.

0.034=(19 \% * 0.70)^{2}+(25 \% * 0.30)^{2}+2 * 19 \% * 0.70 * 25 \% * 0.30 * Correlation coefficent

By calculating the above equation, we get,

=> Correlation coefficent =  0.5356

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