1215

If two stocks have positive covariance, which of the following statements is CORRECT?

A) The two stocks must be in the same industry.

B) If one stock doubles in price, the other will also double in price.

C) The rates of return tend to move in the same direction relative to their individual means.

---

This is a correct description of positive covariance.

If one stock doubles in price, the other will also double in price is true if the correlation coefficient = 1. The two stocks need not be in the same industry.

1215

If the standard deviation of stock A is 10.6%, the standard deviation of stock B is 14.6%, and the covariance between the two is 0.015476, what is the correlation coefficient?

A) 0.0002.

B) 0.

C) +1.

---

The formula is: (Covariance of A and B) / [(Standard deviation of A)(Standard Deviation of B)] = (Correlation Coefficient of A and B) = (0.015476) / [(0.106)(0.146)] = 1

1215

If the standard deviation of returns for stock A is 0.40 and for stock B is 0.30 and the covariance between the returns of the two stocks is 0.007 what is the correlation between stocks A and B?

A) 17.14300.

B) 0.05830.

C) 0.00084.

---

Cov_A,B = (r_A,B)(SD_A)(SD_B), where r = correlation coefficient and SD_x = standard deviation of stock x

Then,  (r_A,B) = Cov_A,B / (SD_A × SD_B) = 0.007 / (0.400 × 0.300) = 0.0583

1215

Stock A has a standard deviation of 10%. Stock B has a standard deviation of 15%. The covariance between A and B is 0.0105. The correlation between A and B is:

A) 0.55.

B) 0.70.

C) 0.25.

---

Cov_A,B = (r_A,B)(SD_A)(SD_B), where r = correlation coefficient and SD_x = standard deviation of stock x

Then, (r_A,B) = Cov_A,B / (SD_A × SD_B) = 0.0105 / (0.10 × 0.15) = 0.700

1215

The standard deviation of the rates of return is 0.25 for Stock J and 0.30 for Stock K. The covariance between the returns of J and K is 0.025. The correlation of the rates of return between J and K is:

A) 0.33.

B) 0.10.

C) 0.20.

---

Cov_J,K = (r_J,K)(SD_J)(SD_K), where r = correlation coefficient and SD_x = standard deviation of stock x

Then, (r_J,K) = Cov_J,K / (SD_J × SD_K) = 0.025 / (0.25 × 0.30) = 0.333