Question of the Week

The covariance between Stock A and Stock Z is 10.32, while the correlation coefficient between the two stocks is -0.35. If the variance to Stock Z is 58, which of the following would best describe the total risk that's inherent in Stock A.

A) It can't be determined since erroneous data has been provided.
B) 3.87%
C) -3.87%
D) -0.51%

Answer:

The correct answer is: A)

COVA,Z = rA,ZsAsZNote: Since s can never be negative, COVA,Z and rA,Z must always have the same sign. (ie., if one is positive then the other must be positive as well).

Therefore, the data was erroneous.