Question is a quick one. How do you know that you must divide by N-1? An analyst observes the following return behavior between stocks X and Y. Time Period X’s Return Y’s return 1 7 5 2 9 8 3 10 11 4 10 8 What is the covariance of returns between stocks X and Y? A) -3.0. B) +3.0. C) -1.5. D) +1.5. Your answer: A was incorrect. The correct answer was B) +3.0. Covariance = [Summation over t=1 of (ReturnX– MeanX) * (ReturnY – MeanY)] / (n - 1) MeanX = (7+9+10+10)/4 = 9; MeanY = (5+8+11+8)/4 = 8 CovX,Y = [(7-9)(5-8)+(9-9)(8-8)+(10-9)(11-8)+(10-9)(8-8)] / (4 - 1) = 3.0

Population = N Sample = n-1

Questions won’t be that ambigous on the actual exam.

Thanx MWVT, yes didn’t seem clear.