Expected return of the X security is 12% and its standard deviation is 20%. Expected return of the Y security is 15% and its standard deviation is 27%. If, the correlation coefficient of the two securities is 0.7; then, what is the covariance between these two securities? A) 0.038 B) 0.070 C) 0.018 D) 0.013 E) 0.054
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Expected return of the X security is 12% and its standard deviation is 20%. Expected return of the Y security is 15% and its standard deviation is 27%. If, the correlation coefficient of the two securities is 0.7; then, what is the covariance between these two securities?
A) 0.038
B) 0.070
C) 0.018
D) 0.013
E) 0.054
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