Question

Returns on stocks X and Y are listed below:

Period	1	2	3	4	5	6	7
Stock X	-5%	4%	3%	9%	1%	-3%	4%
Stock Y	12%	7%	-3%	-2%	4%	6%	-1%

What is the (population) covariance of returns on the two stocks?

Please round your answer to six decimal places.

Note that the correct answer will be evaluated based on the full-precision result you would obtain using Excel.

Answer 1

covariance can be found in excel using following command -

= COVARIANCE.P()

standard deviation can be found out using following command-

=STDEV.P()

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Now,

$correlation=\frac{covariance}{stdev1*stdev2}$

correlation = -0.766867

D А B с 1 PERIOD STOCK-X STOCK-Y 2 1 -0.05 0.12 3 2 0.04 0.07 4 3 0.03 -0.03 5 4 0.09 -0.02 6 5 0.01 0.04 7 6 -0.03 0.06 8 7 0.04 -0.01 9 TOTAL 0.13 0.23 10 MEAN 0.0185714 0.032857 11 StDev 0.0435656 0.05119 12 Cov(X,Y) -0.00171 13 Correlation, r -0.766867

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