A risky security has a variance of .036190 and a covariance with the market of .0222.The variance of the market is .01975.What is the correlation of the risky security to the market?
A).51
B).65
C).72
D).83
E).85

Question

Quizplus · Accepted Answer

Correlation = covariance / (standard deviation of the security * standard deviation of the market)
Standard deviation of the market = sqrt(0.01975) = 0.1405
Standard deviation of the security = sqrt(0.036190) = 0.1902
Correlation = 0.0222 / (0.1405 * 0.1902) = 0.83
Therefore, the correlation of the risky security to the market is 0.83, which corresponds to answer choice D.

A Risky Security Has a Variance of