FRM Part I · FRM Exam Part I · Multivariate Random Variables
Two assets X and Y have a covariance of 0.0048. The standard deviation of X is 8% and the standard deviation of Y is 10%. What is the correlation between X and Y?
The correlation is 0.60. Correlation equals covariance divided by the product of the two standard deviations, so 0.0048 divided by 0.08 times 0.10 (0.008) gives 0.60. This standardizes covariance to lie between -1 and +1.
- A0.06
- B0.60Correct
- C0.38
- D0.96
Explanation
Correlation = Cov / (σX σY) = 0.0048 / (0.08 × 0.10) = 0.0048 / 0.008 = 0.60. Choosing 0.06 comes from dividing by 0.08 only after a decimal slip; 0.38 results from dividing by the sum of the standard deviations incorrectly.
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