Given the returns for two stocks with the following information, calculate the correlation coefficient of the returns for the two stocks. Assume the expected return for Stock 1 is 10.8 percent and 9.7 percent for Stock 2.
Prob
Stock 1
Stock 2
0)4
0)09
0)11
0)5
0)11
0)08
0)1
0)17
0)13

Question

Quizplus · Accepted Answer

The correlation coefficient is a measure of the linear relationship between two variables. It can take on values between -1 and 1, where -1 indicates a perfect negative correlation, 0 indicates no correlation, and 1 indicates a perfect positive correlation.In this case, the correlation coefficient between the returns for the two stocks is 0.230967. This indicates that there is a weak positive correlation between the returns for the two stocks. This means that when the return for Stock 1 is high, the return for Stock 2 is also likely to be high, and when the return for Stock 1 is low, the return for Stock 2 is also likely to be low.

Given the Returns for Two Stocks with the Following Information