Consider Two Securities, a and B

question 53

Multiple Choice

Consider two securities, A and B. Security A and B have a correlation coefficient of 0.65. Security A has standard deviation of 12, and security B has standard deviation of 25. Calculate the covariance between these two securities.

• A) 300
• B) 461.54
• C) 261.54
• D) 195
• E) 200

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Definitions:

Continuous Compounding

The mathematical limit reached when an investment's interest is calculated and added back to the principal at an infinite number of intervals.

Put-Call Parity

A principle in options pricing that defines the relationship between the price of European put and call options with the same strike price and expiration.

Implied Standard Deviation

An estimate of future volatility derived from the market price of an option and other known variables using option-pricing models.

Intrinsic Value

The actual, fundamental worth of an asset, based on underlying perceptions of its true value including all aspects of the business, in terms of both tangible and intangible factors.