Question

I know the answer is D please just provide the workings for the answer.

2. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is 0.0280, the correlation coefficient between the returns on A and B is_ A. .583 B. .225 C..327 D. .100

Answer 1

Let the correlation coefficient be "ar" standard deviation (6A) = 24°%. standard deviation (50) = 18°%. Weight A (WA) = 60% Weight & (WB) = 40%. Variance = .0280 We know that, - 2 2 I + ax r * WA XWB * 6A *5B Variana = 6A WA ? 60 X.40 *• 24 *. 18 2 X r X ? 40200 7.102 :24 *.60 +old 0 - 020736 +005104 + 2 x x x 010368 ? 00259 2 + .020736 r 0280 = ? .00208= .020736r ? r = 00208 0020736 r = .1003 ar 100