The economy of a certain country consists of just three sectors. In terms of market capitalization, Sector1
Question:
The economy of a certain country consists of just three sectors. In terms of market capitalization, Sector1 makes up 20% of the entire economy, (that is, 20% of the market portfolio), and the balance is accounted for by Sectors 2 and 3. The market capitalization of Sector 3is four times as much as that of Sector 2.
The standard deviation of returns on investments is 35% per year for Sector 1, 50% per year for Sector 2, and 25% per year for Sector 3. Returns on Sector 2 are uncorrelated with those on the other two Sectors. The correlation between returns on Sectors 1 and 3 is 0.4325.
Question: Work out the covariance and the correlation between the returns on investments in Sector 1 and returns on the market portfolio.
I was able to calculate the variance of the portfolio, but don't really know what to do after that.