Correlation Coefficient Calculation

Consider a dataset of two stocks, Stock A and Stock B, that have monthly returns over a period of 12 months. The covariance of the returns between the two stocks is estimated to be 0.12, and the standard deviation of the returns for Stock A is 0.4, while for Stock B it is 0.3. You are tasked with determining the correlation coefficient between the returns of these two stocks.

Recall that the correlation coefficient can be calculated using the formula:

$$ \text{Correlation} (A, B) = \f\frac{Cov(A, B)}{\sigma_A \sigma_B} $$

Where:

• $Cov(A, B)$ = covariance of returns of Stock A and B
• $\sigma_A$ = standard deviation of returns of Stock A
• $\sigma_B$ = standard deviation of returns of Stock B

Using this information, what is the correlation coefficient between Stock A and Stock B?