Deck 28: Calculating Covariance and Correlation Coefficient of Assets

Question 1

Exhibit 3A.1
$$\begin{array} { c c c } \text { Year } & \begin{array} { c } \text { Alpine's } \\\text { Rate of Return }\end{array} & \begin{array} { c } \text { Tauber's } \\\text { Rate of Return }\end{array} \\\hline 1995 & 5 & 9 \\1996 & 9 & 16 \\1997 & 11 & - 16 \\1998 & - 10 & 12 \\1999 & 12 & 9\end{array}$$

-Refer to Exhibit 3A.1.Calculate the covariance.

A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20

Answer 1

-32.20

Question 2

What is the correlation coefficient for two assets with a covariance of .0032,if asset 1 has a standard deviation of 12 percent and asset 2 has a standard deviation of 9 percent?

A) 0.2963
B) 0.3456
C) 0.8721
D) 1.5980

Answer 2

A
Correlation coefficient is equal to the Covariance divided by the product of the two individual standard deviations.
.0032/(.12)(.09)= .0032/.0108 = 0.2963

Question 3

Exhibit 3A.1
$$\begin{array} { c c c } \text { Year } & \begin{array} { c } \text { Alpine's } \\\text { Rate of Return }\end{array} & \begin{array} { c } \text { Tauber's } \\\text { Rate of Return }\end{array} \\\hline 1995 & 5 & 9 \\1996 & 9 & 16 \\1997 & 11 & - 16 \\1998 & - 10 & 12 \\1999 & 12 & 9\end{array}$$

-Refer to Exhibit 3A.1.Calculate the coefficient of correlation.

A) -0.456
B) -0.354
C) 0.000
D) 0.456
E) 3.538

Answer 3

-0.354