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Correlation(a,b)= cov(a,b)/(Sa x Sb) = 60%/(9% x 8%) = 83. Why is the answer given 0.83?
Thank youThe covariance cannot be 60%. The way it is calculated means it is % squared!
So simply ignore the %’ages when you do the calculation.The coefficient of correlation can never be more than 1, ever.
(If you want to see how the covariance is calculated, watch my lecture on portfolio theory.)
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John,
Could this be a hot topic? it has not been examined in a long time.
I think no one knows precisely but overall Risk Management topic is very important and it could be any thing…………..Value @ risk,,hedging and portfolio theory like topics can be expected i think………..
You are correct that portfolio theory has not been asked for a very very long time.
I don’t think it is a hot topic though (and if it were to be asked then it would be in section :).
Risk management overall is incredibly important however – especially always foreign exchange risk and interest rate risk.Well you have not looked very well then 🙂
Try looking at the lectures on Chapter 19 of the Paper F2 lecture notes.
However, the posts in this thread date from 2012. If you read our P4 lecture notes you will see that these calculations can no longer be asked in Paper P4. I have left the examples simply to make it clear what we are talking about, because you are still expected to understand the idea of portfolio theory.
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