Question

Suppose that the current daily volatilities of assets X , Y and Z are 1.02% , 1.22% and 1.32% ,respectively. The prices of the assets at close of
trading yesterday were $22, $32 and $42. Covariances are cov(X; Y ) = 0:6; cov(X;Z) = 0:8; cov(Y;Z) = 0:9
Correlations and volatilities are updated using RiskMetrics EWMA model.with λ= 0:92. If the prices of
the three, assets at close of trading today are $25 , $35 and $45, forecast the correlation coefficiets for today.

Answer 1

calculation of correlation coefficient (r) correlation coellicient (tag) CONA,B) SAOB &A= Standard deviation & data set A OB = standard deniations data set B Cox (A,B) Correlation → Covariance of A,B coefficient (x,y) = coulxy) oxoy 1.02 x 1.22 r(x,y) = 0.48 e correlation coefli dent (X2) = Covex2) ox.oz 1.024 1.32 0.59 correlation Coethicient (4,2) =covlY, Z oy yo 0.9 1.22 x 1.32 r (y z) = 0.56

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