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Question 6 (this question has three parts (a), (b) & (c)) There are three securities (A,...

Question 6 (this question has three parts (a), (b) & (c))

There are three securities (A, B and C) in the market. The covariance matrix and the standard deviations of the securities and the market are given in the following tables.

Covariance matrix

	A	B	C
B	-0.086	-	-
C	0.056	-0.0457	-
Market	0.023	-0.0781	0.0354

Standard deviation table

A	B	C	Market
32.25%	48.25%	25.24%	23.25%

Calculate the correlation coefficient between:

A and B.
B and C.
A and C.
A and the market.
B and the market.
C and the market.

(Marks 1 x 6 = 6)

Calculate and explain the market risk for A, B and C.

(Marks 1 x 3 = 3)

Identify and explain the key differences between covariance, correlation and beta in interpreting risk-return relationships.

(Mark 1)

Solutions

Expert Solution

Solving All 6 Parts Of First Question

Correlation = Covariance of 1 and 2 / (Standard Deviation of 1 * Standard Deviation of 2)

Part 1)

Correlation of A and B = -.086 / (.3225*.4825)

Correlation of A and B = -.086 / .1556

Correlation of A and B = -.5527

Part 2)

Correlation of B and C = -.0457 / (.4825*.2524)

Correlation of B and C = -.0457 / .1218

Correlation of A and B = -.37526

Part 3)

Correlation of A and C = .056 / (.3225 * .2524)

Correlation of A and C = .056 / .0814

Correlation of A and C = 0.6879

Part 4)

Correlation of A and Market = .023 / (.3225 * .2325)

Correlation of A and Market = .023 / .075

Correlation of A and Market = .3067

Part 5)

Correlation of B and Market = -.0781/ (.4825 * .2325)

Correlation of B and Market = -.0781/ .1122

Correlation of B and Market = -.6962

Part 6

Correlation of C and Market = .0354 / (.2524 * .2325)

Correlation of C and Market = .0354 / .0587

Correlation of C and Market = .6032

jeff jeffy answered 1 year ago

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