Nneetquant
Get started

Backing out the correlation from portfolio risk

EasyRandom VariablesStatistics~3m

Two assets each have a return standard deviation of 20%20\%. An equal-weight portfolio (half in each) is observed to have a return standard deviation of 15%15\%. What is the correlation ρ\rho between the two assets' returns? Give a decimal to three places.

Show hints (2)+
  1. Square the observed SD, then set 0.02+0.02ρ0.02 + 0.02\rho equal to it.
  2. Compare to the ρ=0\rho=0 baseline 0.02≈14.1%\sqrt{0.02}\approx 14.1\% - a 15%15\% SD means positive correlation.

Answer

Reveal answer →

0.125 (± 0.005)

Want the full step-by-step worked solution? It's part of Premium - along with a worked solution for every question in the bank.

Practise freeUnlock solutions

Asked at: Options Market-Making, ETF Market-Making

Related questions