- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 8. Probability Concepts
- Subject 7. Covariance and Correlation
CFA Practice Question
Covariance of returns is positive ______.
A. when the return on one asset is above its expected value and the return on the other asset is above its expected value
B. when the return on one asset is below its expected value and the return on the other asset is above its expected value
C. when the return on one asset is above its expected value and the return on the other asset is also below its expected value
Explanation: Covariance of returns is positive when the return on one asset is above its expected value and the return on the other asset is above its expected value.
User Contributed Comments 2
| User | Comment |
|---|---|
| sh21 | Aren't B and C pretty much the same thing? |
| ksnider | Covariance(A,B) = E[(A - E(A)) * (B - E(B))] so if A > E(A) and B > E(B) then positive also if A < E(A) and B < E(B) then positive Answer C and B are the same thing, so you can eliminate both and are left with only Answer A |