Consider the following probability distribution for stocks C and D: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock C} & \text { Return on Stock D } \
1 & 0.30 & 7\% & -9\% \
2 & 0.50 & 11\% & 14\% \
3 & 0.20 & -16\% & 26\%
\end{array}$

The coefficient of correlation between C and D is
A) 0.67.
B) 0.50.
C) -0.50.
D) -0.67.
E) None of the options are correct.

Question

Consider the following probability distribution for stocks C and D: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock C} & \text { Return on Stock D } \
1 & 0.30 & 7\% & -9\% \
2 & 0.50 & 11\% & 14\% \
3 & 0.20 & -16\% & 26\%
\end{array}$

The coefficient of correlation between C and D is
A) 0.67.
B) 0.50.
C) -0.50.
D) -0.67.
E) None of the options are correct.

Quizplus · Accepted Answer

The correlation coefficient is calculated using the covariance of returns and the standard deviations of the stocks. The negative correlation indicates that when one stock performs well, the other tends to perform poorly, which is consistent with the given returns.

Consider the Following Probability Distribution for Stocks C and D