In: Finance
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:
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.