Question

Which of the following is a measurement of the co-movement between two variables that ranges between-1 and +1? Multiple Choice O Total risk Coefficient of variation O Standard deviation Correlation

Answer 1

Total Risk is actually a combination of the asset's diversifiable and non-diversifiable risks. The same is measured by standard deviation and is expressed in %. The Coefficient of Variation is a ratio of the standard deviation of the asset to its return, thereby expressing the risk per unit of return.

Correlation is a parameter that measures the co-movement of two variables and is dependent on the variables covariance and individual standard deviations. Hence, it is expressed as a fraction of the product of the standard deviations of the two variables.

Therefore, the correlation varies between - 1 (for perfect opposite movement) and +1 (for perfect same direction movement) and measures the magnitude of the variables co-movement.

Hence, the correct option is (d)