Security X has expected return of 14% and standard deviation of 22%

Finance Sep 01, 2020

Security X has expected return of 14% and standard deviation of 22%. Security Y has expected return of 16% and standard deviation of 28%. If the two securities have a correlation coefficient of 0.8, what is their covariance?

Expert Solution

Computation of the covariance:-

Correlation coefficient = Covariance / (Standard deviation of X * Standard deviation of Y)

0.8 = Covariance / (22% * 28%)

Covariance = 0.8 * 22% * 28%

= 0.0493

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