A portfolio is composed of two shares, A and B. Share A has a standard deviation of return of 24% while Share B has a standard deviation of return of 18%. Share A comprises 60% of the portfolio while Share B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is ________.
A)0.583
B)0.225
C)0.327
D)0.128

Question

Quizplus · Accepted Answer

The correct answer is A because the correlation coefficient between the returns on A and B is 0.583. This can be calculated using the formula:Correlation coefficient = (Covariance of A and B) / (Standard deviation of A * Standard deviation of B)In this case, the covariance of A and B is 0.0224, the standard deviation of A is 0.24, and the standard deviation of B is 0.18. Plugging these values into the formula, we get:Correlation coefficient = 0.0224 / (0.24 * 0.18) = 0.583

A Portfolio Is Composed of Two Shares, a and B