Question

PLEASE SHOW HOW YOU SOLVE THE EQUATION--I WOULD LIKE TO SEE THE STEPS TAKEN TO ARRIVE AT THE ANSWER. THANK YOU!

Check my work Greta, an elderly investor, has a degree of risk aversion of A= 4 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 7% per year, with a SD of 18%. The hedge fund risk premium is estimated at 5% with a SD of 25%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual returns on the S&P 500 and the hedge fund in the same year is zero, but Greta is not fully convinced by this claim. points eBook Print If the correlation coefficient between annual portfolio returns is actually 0.3, what is the covariance between the returns? (Round your answer to 3 decimal places.) References Annual covariance

Answer 1

Covariance = Correlation coefficeint * standard deviation of S&P* standard deviation of hedge fund
= 0.3 * 0.18 * 0.25
= 0.0135
Covariance = 0.0135