Stock A and Stock B are combined into an equally weighted portfolio. If Stock A has a standard deviation of return of 30%, Stock B has a standard devi... Accounting MCQs | Accounting MCQs

Stock A and Stock B are combined into an equally weighted portfolio. If Stock A has a standard deviation of return of 30%, Stock B has a standard deviation of return of 30%, and the portfolio of the two stocks has a standard deviation of return of 30%, what is the correlation coefficient of the returns between the two stocks?

-0.050-1.01.0Show Result

Correct - Your answer is correct.

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Detailed Answer

Answer (D) is correct. Since both stocks have the same standard deviation as the portfolio, they fluctuate together and are perfectly correlated. Perfect correlation implies a coefficient of 1.0. It can also be figured mathematically using the covariance formula: Covariance of two-stock portfolio = Correlation coefficient × Standard deviation of Stock A × Standard deviation of Stock B
(0.3)2 = Correlation coefficient × .3 × .3
0.09= Correlation coefficient × .09
Correlation coefficient = 1.0