FRM Part I · FRM Exam Part I · Measuring Return, Volatility, and Correlation
Two assets have return volatilities of 20% and 30% per year and a covariance of 0.024. A risk manager wants to know the correlation. What is it?
The correlation is 0.40. It equals covariance divided by the product of the volatilities: 0.024 divided by (0.20 times 0.30, which is 0.06) gives 0.40.
- A0.20
- B0.40
- C0.80Correct
- D0.50
Explanation
Correlation = covariance / (sigma1 x sigma2) = 0.024 / (0.20 x 0.30) = 0.024 / 0.06 = 0.40. Check: 0.40 x 0.06 = 0.024. Wait, this gives 0.40, so the correct choice is 0.40.
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