In: Finance
A portfolio is composed of two stocks, Air New Zealand and BP. Air New Zealand has a standard deviation of return of 28%, while stock BP has a standard deviation of return of 16%. Air New Zealand 40% of the portfolio, while stock BP comprises 60% of the portfolio. If the variance of return on the portfolio is .045, what is the correlation coefficient between the returns on A and B?
Standard deviation Air New Zealand | 0.28 |
Standard deviation BP | 0.16 |
W (A) | 0.4 |
W (B) | 0.6 |
Variance of portfolio | 0.45 |
Correlation coefficient= standard deviation of portfolio/ standard deviation of stock A* standard deviation of stock B | |
Standard deviation of portfolio= Square root of variance of portfolio | |
square root of .45 =.671 | |
Correlation coefficient= 0.671/0.28*0.16 = 0.1496 |