Correlation Within an Asset Class and Between Asset Classes
An investment adviser reviews two stocks and five years' worth of returns data:
| Year | Stock P Return % | Stock Q Return % |
|------|------------------|------------------|
| 1 | 35 | 25 |
| 2 | -10 | 0 |
| 3 | 40 | 30 |
| 4 | 0 | 5 |
| 5 | 10 | 10 |
Their correlation coefficient is _closest_ to:
Incorrect.
A correlation coefficient of -1 would suggest strong, negative correlation, but stocks P and Q are not negatively correlated based on the movements of their returns in the same periods.
Incorrect.
It cannot be concluded that stocks P and Q are fully independent of one another, which is suggestive of a correlation coefficient of zero. Consider how the returns of stocks P and Q move in relation to one another from one period to the next.
Correct!
Based on a plot of return versus years on the same graph, it can be seen that the two stocks cycle in a similar return pattern, and they appear to be dependent.
They are not quite perfectly correlated, but they are closest to +1.
[[calc: data 35 enter down 25 enter down 10 sign enter down 0 enter down 40 enter down 30 enter down 0 enter down 5 enter down 10 enter down 10 enter stat down down down down down down down down down down , 35 enter 25 sigplus 10 chs enter 0 sigplus 40 enter 30 sigplus 0 enter 5 sigplus 10 enter 10 sigplus 1 xr x<>y]]
Note that your TI BA Plus should be in LIN mode clicking 2ND + ENTER until LIN is displayed; otherwise if 1-V SET then will get 'error 4'.
-1.
0\.
+1.
