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The variance of returns is 0.09 for Stock A and 0.04 for Stock B. The covariance...

The variance of returns is 0.09 for Stock A and 0.04 for Stock B. The covariance between the returns of A and B is 0.006. The correlation of returns between A and B is:

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Expert Solution

Information provided:

Variance of returns of stock A= 0.09

Variance of returns of stock B= 0.04

Covariance between stock A and B= 0.06

Standard deviation of stock A= 0.09= 0.30.

Standard deviation of stock B= 0.04= 0.20.

Correlation between stock A and B is calculated using the below formula:

Correlation between stock A and B= Covariance between stock A and B/ Standard deviation of stock A* Standard deviation of stock B

Correlation between stock A and B= 0.06/ 0.30*0.20

                                                                   = 0.06/ 0.06

                                                                   = 1

Therefore, the correlation between stock A and B is 1.


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