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14 August, 08:59

Horse Stock returns have exhibited a standard deviation of 0.57, whereas Mod T Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042.

What is the covariance of the returns?

A) 0.028025

B) 0.217327

C) 0.3591007

D) 0.993094

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  1. 14 August, 09:07
    0
    Answer: A) 0.028025

    Explanation:

    Covariance measures thw relationship between 2 random variables by measuring the variations of two variables from their expected value.

    When calculating covariance we use the following formula,

    Cov (R1, R2) = p12*σ1*σ2

    Where

    p12 is the correlation coefficient

    σ1 is the standard deviation of Variable 1

    σ2 is the standard deviation of Variable 2.

    Calculating then we have,

    Cov (hs, mt) = 0.078042 * 0.57 * 0.63

    Cov (hs, mt) = 0.0280248822

    Cov (hs, mt) = 0.028025

    The covariance of the returns is 0.028025.
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