Question

Two securities have a covariance of 0.022. If their correlation coefficient is 0.52 and one has a standard deviation of 15%, what must be the standard deviation of the other security?

Answer 1

Answer: 28.2%

Explanation:

Correlation Coefficient = Covariance / (Standard deviation of Security A * Standard deviation of Security B)

0.52 = 0.022 /( 15% * σ)

(15% * σ) * 0.52 = 0.022

15% * σ = 0.022 / 0.52

σ = 0.0423/15%

= 28.2%