CFA Level I · CFA Level I Exam · Statistical Characteristics of Asset Returns
The covariance between the returns of Asset X and Asset Y is 0.0060. The standard deviation of X returns is 0.20 and the standard deviation of Y returns is 0.15. The correlation between the returns is closest to:
The correlation is about 0.20. It equals covariance divided by the product of the two standard deviations: 0.0060 divided by (0.20 times 0.15, which is 0.030) gives 0.20, a modest positive linear relationship.
- A0.12
- B0.20Correct
- C0.30
Explanation
Correlation = covariance / (sd X × sd Y) = 0.0060 / (0.20 × 0.15) = 0.0060 / 0.030 = 0.20. Choosing 0.30 would result from dividing by only 0.020, a calculation error, and 0.12 arises from dividing by 0.05, a wrong denominator.
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