The returns on assets C and D are strongly correlated with a correlation coefficient of 0.80. The variance of returns on C is 0.0009, and the variance of returns on D is 0.0036. What is the covariance of returns on C and D? A) 0.03020. B) 0.00144. C) 0.40110. D) 1.44024.

Option (B) 0.00144

Explanation:

Data provided in the question:

Correlation coefficient, r = 0.80

Variance of returns on C = 0.0009

Variance of returns on D, = 0.0036

Now,

r = Cov (C, D) / (σA x σB)

Thus,

covariance of returns on C and D, Cov (C, D) = r * (σA x σB)

also,

σA = (0.0009) * 0.5 = 0.03 [ Since there are two assets, weight = 0.5 ]

σB = (0.0036) * 0.5 = 0.06

Therefore,

covariance of returns on C and D, Cov (C, D) = 0.8 * 0.03 * 0.06)

or

covariance of returns on C and D = 0.00144

Hence,

Option (B) 0.00144