Hi Analyst Forum
When solving for one unknown is there then a general rule for how to isolate it?
Two stocks A and B:
- Correlation of 0.50
- Covariance of 0.0043
- Standard deviation of stock B of 26%
Find the standard deviation of returns for Stock A.
In that case I write
Corr(A,B) = Cov(A,B) / sigma_A * sigma_B => 0.50 = 0.0043 / sigma_A * 0.26
<=> Isolate for sigma A by multiplying 0.26 on both sides and dividing by 0.0043
sigma_A = (0.50*0.26) / 0.0043 = 30.23 (and now I have to divide 1/30.23 to get the right result).
If I go the correct way and
<=> Isolate for sigma A by multiplying sigma_A on both sides and dividing by 0.50 I get the correct result
sigma_A = 0.0043 / 0.50 * 0.26 = 0.0331.
Is there something I’m missing or a general rule of how to solve/isolate equations?