Answer to Question #196619 in Financial Math for Red

Question

Assume covariance between returns R5 of Asset 5 and returns R1 of Asset 1 is 0.018, while correlation between those returns is smaller than 0.9. Understand in what case Asset 2 dominates Asset 5.

can derive standard deviation of the returns of Asset 5 using the relation between covariance, ( correlation and standard deviation / variance and mean / correlation and mean ) namely correlation equals the covariance between both returns ( divided by product of their standard deviations / multiplied by product of their standard deviations). We rearrange identity to obtain standard deviation of returns of Asset 5. We find that it is (larger than / equal to / smaller than) standard deviation of the returns of Asset 2. Thus Asset 2 dominates Asset 3 if (its expected return is larger than or equal to that of Asset 5 / its standard deviation is larger than or equal to that of Asset 5 / its expected return is smaller than or equal to that of Asset 5/its standard deviation is smaller than or equal to that of Asset 5).