Skip to content

FRM Part I · FRM Exam Part I · Measuring Return, Volatility, and Correlation

Which statement about covariance and correlation of two return series is correct?

Correlation is scale-free: multiplying a return series by a positive constant scales covariance and the standard deviation equally, so correlation is unchanged while covariance changes. Covariance is unbounded, and zero correlation does not imply independence.

  1. ACorrelation is unaffected by rescaling either return series by a positive constant, while covariance changesCorrect
  2. BCovariance is bounded between -1 and +1
  3. CA correlation of zero implies the two returns are statistically independent
  4. DCorrelation measures the nonlinear dependence between returns as well as the linear dependence

Explanation

Correlation is covariance divided by the product of standard deviations, so positive scaling cancels out, while covariance scales with the units. Covariance is unbounded. Zero correlation implies only no linear relation, not independence. Correlation captures only linear dependence.

Did you get it right without looking?

One question tells you little. A timed set on Measuring Return, Volatility, and Correlation shows your real accuracy, how long you take and where you lose marks.

Practise Measuring Return, Volatility, and CorrelationFree diagnostic mock

More Measuring Return, Volatility, and Correlation questions