CFA Level I · CFA Level I Exam · Statistical Characteristics of Asset Returns
The covariance between the returns of Asset A and Asset B is 0.0048. The standard deviation of Asset A is 8% and that of Asset B is 10%. The correlation between the two assets is closest to:
The correlation is about 0.60. It equals the covariance of 0.0048 divided by the product of the standard deviations, 0.08 times 0.10, which is 0.008. Using only one standard deviation, or squaring one, gives incorrect values.
- A0.38
- B0.60Correct
- C0.75
Explanation
Correlation = covariance / (σA × σB) = 0.0048 / (0.08 × 0.10) = 0.0048 / 0.008 = 0.60. Dividing by 0.08 alone gives 0.06, and 0.0048/0.0064 (using 8% squared) gives 0.75, which is the wrong denominator.
Did you get it right without looking?
One question tells you little. A timed set on Statistical Characteristics of Asset Returns shows your real accuracy, how long you take and where you lose marks.
More Statistical Characteristics of Asset Returns questions
- For a unimodal, negatively skewed distribution of returns, the relationship among the mean, median and mode is most likely:
- A sorted data set contains 19 annual returns (%). Using the position formula L_y = (n + 1) × y/100, the 20th percentile is located at positi…
- A portfolio had annual returns of +20%, -10% and +20% over three years. The geometric mean annual return is closest to:
- A portfolio manager compares two return series with identical means and standard deviations. Series X has a sample skewness of -0.9 and Seri…
- An analyst doubles every return in a data series for Asset M while leaving the returns of Asset N unchanged. Compared with the original valu…
- According to Chebyshev's inequality, the minimum proportion of observations of any distribution that lies within 2.5 standard deviations of …