Using the data in the following table, Historical Annual Volatilities and Correl
ID: 2788215 • Letter: U
Question
Using the data in the following table,
Historical Annual Volatilities and Correlations for Selected Stocks (based on monthly returns, 1996-2014)
Microsoft
HP
Alaska
Air
Southwest Airlines
Ford
Motor
Kellogg
General
Mills
Volatility (Standard Deviation)
0.33
0.37
0.37
0.31
0.5
0.2
0.17
Correlation with
Microsoft
1
0.39
0.21
0.24
0.27
0.05
0.08
HP
0.39
1
0.28
0.35
0.27
0.11
0.06
Alaska Air
0.21
0.28
1
0.39
0.15
0.15
0.2
Southwest Airlines
0.24
0.35
0.39
1
0.3
0.15
0.22
Ford Motor
0.27
0.27
0.15
0.3
1
0.18
0.06
Kellogg
0.05
0.11
0.15
0.15
0.18
1
0.54
General Mills
0.08
0.06
0.2
0.22
0.06
0.54
1
what is the covariance between the stocks of
Alaska Air and Ford Motor?
The covariance between the stocks of
Alaska Air and Ford MotorAlaska Air and Ford Motor
is ________.
(Round to three decimal places.)
Microsoft
HP
Alaska
Air
Southwest Airlines
Ford
Motor
Kellogg
General
Mills
Volatility (Standard Deviation)
0.33
0.37
0.37
0.31
0.5
0.2
0.17
Correlation with
Microsoft
1
0.39
0.21
0.24
0.27
0.05
0.08
HP
0.39
1
0.28
0.35
0.27
0.11
0.06
Alaska Air
0.21
0.28
1
0.39
0.15
0.15
0.2
Southwest Airlines
0.24
0.35
0.39
1
0.3
0.15
0.22
Ford Motor
0.27
0.27
0.15
0.3
1
0.18
0.06
Kellogg
0.05
0.11
0.15
0.15
0.18
1
0.54
General Mills
0.08
0.06
0.2
0.22
0.06
0.54
1
Explanation / Answer
Cov(1,2) = Corr(1,2) x SD(1) x SD(2)
Here, Corr(1,2) - Correlation between Ford and Alaska = 0.15 (from the table), SD(1) - Std. Dev. of Ford = 50% and SD(2) - Std. Dev. of Alaska = 37%
=> Covariance between Ford and Alaska, Cov(1,2) = 0.15 x 50% x 37% = 0.028
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