Asked by Megan Smith on Jun 07, 2024
Verified
The ________ is the covariance divided by the product of the standard deviations of the returns on each fund.
A) covariance
B) correlation coefficient
C) standard deviation
D) reward-to-variability ratio
Correlation Coefficient
The correlation coefficient is a statistical measure that calculates the strength and direction of a linear relationship between two variables on a scale of -1 to 1.
Covariance
Covariance is a measure used in statistics to determine how two variables move in relation to each other, often used in portfolio theory to assess risk.
- Appreciate the pivotal role of correlation coefficient and covariance in portfolio development.
Verified Answer
DM
diandra manningJun 11, 2024
Final Answer :
B
Explanation :
The given description matches the formula for the correlation coefficient, which measures the strength and direction of the linear relationship between two variables. The correlation coefficient is symbolized by the letter "r," and it ranges from -1 to +1. A negative value indicates an inverse relationship, while a positive value indicates a direct relationship. A value of 0 means that there is no linear relationship.
Learning Objectives
- Appreciate the pivotal role of correlation coefficient and covariance in portfolio development.