Answer (D) is correct . An important measurement used in portfolio analysis is the covariance. It measures the volatility of returns together with their correlation with the returns of other securities. For two stocks X and Y, the covariance is calculated using the following formula:
Answer (A) is incorrect because The variance is calculated for a single investment.
Answer (B) is incorrect because The standard deviation is calculated for a single investment. The standard deviation gives an exact value for the tightness of the distribution and the riskiness of the investment. The standard deviation ( σ) is the square root of the variance.
Answer (C) is incorrect because The coefficient of variation is calculated for a single investment. The coefficient of variation is useful when the rates of return and standard deviations of two investments differ. It measures the risk per unit of return because it divides the standard deviation by the expected return.
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