The variance of Stock A is .005,the variance of the market is .008 and the covariance between the two is .0026. What is the correlation coefficient?
A) .2003
B) .2115
C) .3280
D) .4111
E) .5915

Question

Quizplus · Accepted Answer

The correlation coefficient can be calculated using the formula:

correlation coefficient = covariance / (standard deviation of Stock A * standard deviation of the market)

The standard deviation of Stock A can be found by taking the square root of its variance:

standard deviation of Stock A = sqrt(0.005) = 0.0707

The standard deviation of the market can be found by taking the square root of its variance:

standard deviation of the market = sqrt(0.008) = 0.0894

Substituting these values into the formula gives:

correlation coefficient = 0.0026 / (0.0707 * 0.0894) = 0.4111

Therefore, the correlation coefficient is 0.4111, which corresponds to answer choice D.

The Variance of Stock a Is