You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ________ and the line of best fit has a ________.
A) all fall on the line of best fit; positive slope
B) all fall on the line of best fit; negative slope
C) are widely scattered around the line; positive slope
D) are widely scattered around the line; negative slope

Question

Quizplus · Accepted Answer

A correlation coefficient of -1 indicates a perfect negative linear relationship between stock A and the market index. Therefore, all the points of the scatter diagram will fall exactly on the line of best fit, which will have a negative slope.

You Are Constructing a Scatter Plot of Excess Returns for Stock