Question

A portfolios 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 .034, the correlation coefficient between the returns on A and B is_____.
a. 536.
b. 375.
c. 161.
d. 134.

Answer 1

Answer:

0.536

Explanation:

The computation of the correlation coefficient is shown below:-

$\sigma^2_A \times w^2_A + \sigma^2_B \times w^2_B + 2\times w_A \times w_B \times \rho_{AB} \times \sigma_A \times \sigma_B = 0.034$

$0.19^2 \times 0.70^2 + 0.25^2\times 0.30^2 + 2*0.70 \times 0.30 \times \rho_{AB} \times 0.19\times 0.25 = 0.034$

$0.023314 + 0.01995 \times \rho_{AB} = 0.034$

$0.01995 \times \rho_{AB} = 0.010686\\\\\rho_{AB} = 0.536$

Therefore for computing the correlation coefficient between the returns on A and B we simply applied the above formula.

So, according to the question the option is not available. The right answer is 0.536 and the same is not considered