Question

The variance of return on investment A is 144 percent squared while the variance of return on investment B is 225 percent squared. If the covariance of returns on A and B is 150 percent squared, the correlation coefficient between the returns on A and B is closest to:

• A. 187.5
• B. 0.0046
• C. 1.2
• D. 0.83

Answer 1

Variance of A= 144%/100

Variance of B = 225%/100

Covariance between A and B= 150%/100

Correlation Coefficient Formula = Covariance between A and B/(Variance of A*Variance of B)

=150/(144*225)

=0.0046296296

So Correlation Coefficient is 0.0046. Answer is B