FRM Part I · FRM Exam Part I · Multivariate Random Variables
Two assets have a covariance of 0.0036 between their returns. Asset X has a standard deviation of 10% and Asset Y has a standard deviation of 12%. What is the correlation between X and Y?
The correlation is 0.30. Correlation equals covariance divided by the product of the two standard deviations, so 0.0036 divided by (0.10 times 0.12 = 0.012) gives 0.30. Correlation must lie between -1 and +1, which rules out values such as 3.00.
- A0.30Correct
- B0.43
- C0.03
- D3.00
Explanation
Correlation = Cov/(σX σY) = 0.0036/(0.10 × 0.12) = 0.0036/0.012 = 0.30. Option 0.43 would come from dividing by the variance-style product incorrectly (e.g., using sqrt of something else), and 3.00 results from a decimal slip and is impossible since correlation cannot exceed 1.
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