The correlation coefficient between two assets equals to _________.
A) their covariance divided by the product of their variances
B) the product of their variances divided by their covariance
C) the sum of their expected returns divided by their covariance
D) their covariance divided by the product of their standard deviations

Question

Quizplus · Accepted Answer

The correlation coefficient between two assets is defined as their covariance divided by the product of their standard deviations. Therefore, choice D is the correct answer. Choice A is incorrect because it divides the covariance by the product of the variances, not the standard deviations. Choice B is also incorrect because it multiplies the variances and divides by the covariance, which is not the correct formula for correlation. Choice C is incorrect because it involves the expected returns, which are not relevant to the calculation of correlation.

The Correlation Coefficient Between Two Assets Equals to _________