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Question 3 Probability Rate of Return on Security A...

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Question

Finance

Question 3

Probability

Rate of Return on Security A

Rate of Return on Security B

0.1

30

25

0.2

22

18

0.2

15

17

0.3

6

8

0.05

5

7

0.15

10

6

The correlation coefficient, ,, measures the strength of association between two shares (in this case, shares A and B) and is given by:

,=

Where is the covariance of the expected returns between shares A and B and , are the respective standard deviations of the returns on shares A and B. The column headed probability shows the chance of the various expected returns on shares A and B.

Based on the above information in the table, calculate the correlation coefficient between shares A and B. Show all workings.

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