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