Question

A investar's portolo conkiyts of two stocks: A and B. The following represents each stock's rate of retum (in % ) for a sample of six periods. Find the correiation.

Answer 1

The question is about calculating the correlation between the rates of return for two stocks over a certain period. Though we cannot compute the exact correlation without specific data, the general method involves calculating covariance and dividing it by the product of the standard deviations of both stocks.

Step-by-step explanation:

The student's question is about finding the correlation between two stocks, A and B, based on their rates of return over six periods. To find the correlation, one would typically calculate the covariance of the two stocks' returns and divide it by the product of their standard deviations. However, the specific rates of return are not provided, so we cannot calculate the exact correlation in this case. If the rates of return were known, the following steps would be taken:

1. Compute the mean return for each stock.
2. Calculate the deviations of each period's return from the mean for both stocks.
3. Compute the product of the deviations for each period for both stocks.
4. Sum up these products to find the covariance.
5. Separately, calculate the standard deviations of each stock's returns.
6. Divide the covariance by the product of the two standard deviations to get the correlation coefficient.

The correlation coefficient ranges from -1 to +1, where -1 indicates a perfect inverse relationship, 0 indicates no linear relationship, and +1 indicates a perfect positive relationship between the two stocks' returns.

Learn more about Correlation