Which of the following statements is correct?
A) For a few firms in completely different industries, it is possible to have a correlation that approaches −2.0.
B) A correlation of −1.0 means that the two firms are uncorrelated or that they have no relationship.
C) Most common stocks have low correlation with each other since they operate in different industries.
D) None of the statements are correct.

Question

Quizplus · Accepted Answer

A correlation coefficient ranges between -1 and 1, so a correlation of -2.0 is not possible. A correlation of -1.0 indicates a perfect inverse relationship, not a lack of correlation. Stocks from different industries can still have correlations due to market-wide or economic factors, making the statement about most common stocks having low correlation inaccurate.

Which of the Following Statements Is Correct