Question

1. Based on the outcomes in the following table, choose which of the statements below is (are) correct?

Scenario	Security A	Security B	Security C
Recession	Return > E(r)	Return = E(r)	Return < E(r)
Normal	Return = E(r)	Return = E(r)	Return = E(r)
Boom	Return < E(r)	Return = E(r)	Return > E(r)

I. The covariance of security A and security B is 50.

II. The correlation coefficient between securities A and C is negative.

III. The correlation coefficient between securities B and C is positive.

A. II only

B. III only

C. I and II only

D. I, II, and III

Answer 1

Statement I is False. Covariance is not 50. We need actual data to calculate that value

Statement II is True.
Correlation between A and C is negative because the returns are completely opposite in Recession and Boom

Statement III is false .
Correlation between B and C is 0. Hence it is not positive because returns of B is constant .

Hence Option a is correct .II only