Question

1. using daily historical returns for the S&P 500 and the Toronto Stock Exchange Composite (TSX) you notice that the majority of the times when the S&P 500 has positive returns so does the TSX composite. Based on this qualitative assessment, one could expect that:

a) the covariance between the return in the S&P 500 and TSX is greater than 0

b)the covariance between the return in the S&P 500 and TSX is equal to 0

c) the correlation between the returns in the S&P 500 and TSX is greater than 1

d)the correlation between the returns in the S&P 500 and TSX is equal to 1

2. Consider a portfolio formed of two risky assets whose returns have a correlation of 0.5. What can be said of the standard deviation of the global minimum-variance portfolio formed with these two risky assets?

a) its the weighted average of the standard deviation of the two risky assets

b) its greater than zero

c) its between -1 and 1

d) its equal to zero

Answer 1

1, Since both indices majorly moves in same direction the correct answer would be a).

2. Since the correlation is equal to .5 the standard deviation would be greater than zero. The answer would be b).