Question

Question 8 (1 point) Horse Stock returns have exhibited a standard deviation of 0.57, whereas Mod T Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042. What is the covariance of the returns? Round your answer to six decimal places.

Answer 1

Question has been answered using the following :

r(h,m) = Correlation between Hourse Stock returns and Mod T Stock returns

COV(h,m) = Covariance between the two stock returns

s(h) = Standard deviation of Horse stock returns

s(m) = Standard deviation of Mod T Stock returns

The answer is as follows :

Formula for Correlation is as follows :
r(h.,m) = COV(h,m)/s(h)*s(m)
Therefore putting the figures given in question in above formula, we get :
0.078042 = COV(h,m)/(0.57*0.63)
Hence, we get COV (h,m) = 0.028