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^AORD RIO ANZ WES TLS Date Adj Close Adj Close Adj Close Adj Close Adj Close...

^AORD RIO ANZ WES TLS
Date Adj Close Adj Close Adj Close Adj Close Adj Close
31/1/13 5120.4 66.36 19.84806 19.57102 3.212754
28/2/13 4979.9 67.05 19.71675 19.69255 3.255187
31/3/13 5168.6 57.2 22.00425 21.24546 3.594419
30/4/13 4914 55.8 19.03257 19.22232 3.421195
31/5/13 4775.4 55.18 20.2205 19.39867 3.442847
30/6/13 5035.7 52.37 21.05536 19.86891 3.601637
31/7/13 5125.3 57.51 21.00583 19.91794 3.536677
31/8/13 5217.7 58.3 21.77701 20.86289 3.688453
30/9/13 5420.3 61.74 23.94198 21.79624 3.844303
31/10/13 5314.3 63.99 22.56942 21.50087 3.755246
30/11/13 5353.1 66.06 23.43381 22.06193 3.896254
31/12/13 5205.1 68.18 21.90694 21.04004 3.814618
31/1/14 5415.4 65.64 23.36837 21.51595 3.747824
28/2/14 5403 66.84 24.03729 21.20243 3.877173
31/3/14 5470.8 63.55 25.06247 21.98485 3.984024
30/4/14 5473.8 61.7 24.34993 22.31941 4.075611
31/5/14 5382 59.3 24.85111 21.53699 3.976392
30/6/14 5623.1 59.31 25.32071 22.65917 4.190094
31/7/14 5624.6 66.38 24.9182 22.29369 4.24352
31/8/14 5296.8 62.63 23.04729 22.42818 4.153627
30/9/14 5505 59.58 24.97038 23.48155 4.412249
31/10/14 5298.1 60.41 23.79267 21.65335 4.459271
30/11/14 5388.6 59.1 24.61535 21.98998 4.678707
31/12/14 5551.6 58 25.31339 22.9756 5.09407
31/1/15 5898.5 57.56 27.10834 23.1127 4.992188
28/2/15 5861.9 64.41 28.10554 23.80803 5.060349
31/3/15 5773.7 57.23 26.07279 23.67265 4.996192
30/4/15 5774.9 57.15 25.45914 23.64556 4.988173
31/5/15 5451.2 58.2 25.36044 21.13805 4.924016
30/6/15 5681.7 53.75 25.73849 22.99026 5.204701
31/7/15 5222.1 52.86 21.99743 22.02082 4.627292
31/8/15 5058.6 50.29 21.32798 22.10167 4.620785
30/9/15 5288.6 48.6 21.43036 22.20873 4.447815
31/10/15 5218.2 50.65 21.3831 21.46487 4.414868
30/11/15 5344.6 45.91 22.81056 23.44851 4.620785
31/12/15 5056.6 44.71 19.74792 23.76406 4.637259
31/1/16 4947.9 39.13 18.29418 22.02842 4.324265
29/2/16 5151.8 40.28 19.15989 24.12315 4.390159
31/3/16 5316 42.69 19.82142 24.89136 4.549177
30/4/16 5447.8 51.55 20.80963 23.64598 4.744384
31/5/16 5310.4 44.69 20.34638 23.33752 4.718923
30/6/16 5644 45.5 21.79728 24.9845 4.897155
31/7/16 5529.4 49.56 22.69144 24.69935 4.464305
31/8/16 5525.2 47.6 23.30722 26.4623 4.524136
30/9/16 5402.4 51.61 23.49281 24.60811 4.34946
31/10/16 5502.4 54.18 23.96519 25.07016 4.410597
30/11/16 5719.1 57.75 26.40722 25.28618 4.454266
31/12/16 5675 59.9 25.42628 24.15813 4.366928
31/1/17 5761 66.68 26.8239 25.63424 4.209718
28/2/17 5903.8 61.99 27.62254 27.98426 4.069976
31/3/17 5947.6 60.46 28.43854 26.69895 3.808148
30/4/17 5761.3 60.44 24.31513 26.51268 3.970581
31/5/17 5764 62.81 25.59965 24.91076 3.880341
30/6/17 5773.9 63.27 26.41078 25.28949 3.699859
31/7/17 5776.3 65.79 26.20577 26.46303 3.311826
31/8/17 5744.9 67.84 26.38404 26.71963 3.281864
30/9/17 5976.4 66.53 26.66927 27.0235 3.328882
31/10/17 6057.2 69.45 25.3679 28.39412 3.225442
30/11/17 6167.3 70.95 26.31148 28.71733 3.413514
31/12/17 6146.5 75.81 26.165 28.32299 3.451129
31/1/18 6117.3 76.85 26.59529 26.71963 3.150213
28/2/18 5868.9 81.16 24.59034 27.81488 3.017585
31/3/18 6071.6 72.7 24.57203 29.29397 3.056025
30/4/18 6123.5 79.86 24.91077 30.49197 2.69084
31/5/18 6289.7 82.97 26.60997 33.03524 2.517857
30/6/18 6366.2 83.44 27.60878 33.1021 2.72928
31/7/18 6427.8 81.2 27.79724 34.43402 2.979144
31/8/18 6325.5 72.74 26.55343 34.4696 3.139685
30/9/18 5913.3 78.76 24.4333 32.23617 3.03142
31/10/18 5749.3 76.4 25.25308 30.69307 2.883785
30/11/18 5709.4 73.28 23.74844 31.30518 2.805047
31/12/18 5937.3 78.47 24.30186 31.29546 3.060946
31/1/19 6252.7 87.05 27.18546 32.23792 3.080631
28/2/19 6261.7 96.16 25.27276 34.65 3.32
31/3/19 6418.4 97.91 26.40873 36.01 3.38
30/4/19 6491.8 95.37 27.06895 37.05 3.65
31/5/19 6699.2 100.3 28.21 36.16 3.85

Using historical prices of the Australian All Ordinaries Index (AORD) and the following four companies traded on the Australian Stock Exchange: Rio Tinto Limited (RIO.AX), ANZ Ltd (ANZ.AX), Wesfarmers Ltd (WES.AX) and Telstra Corp. (TLS.AX) provided above, answer the following questions:

1. Compute the monthly return correlation coefficients between each pair of two stocks and between each stock and the market index. which pair of stock has the highest and lowest correlation? Which stock (s) has the highest and lowest correlations with the market?

Hint: use Excel function CORREL() to compute the correlation coefficient between two data series.

1.1. Can you suggest some economic reasons to explain the high and low correlation between stocks in (1)? If you were to form a portfolio of two stocks, which ones would you choose to maximise the benefits of diversification? Give reasons for your answer.

Solutions

Expert Solution

BETWEEN
STOCKS		 Monthly return
correlation coefficients
RIO & ANZ 0.62
RIO & WES 0.76
RIO & TLS -0.69
AORD & RIO 0.78
ANZ & WES 0.60
ANZ & TLS -0.19
ANZ AORD 0.84
AORD & WES 0.89
TLS & WES -0.52
AORD & TLS -0.40

HIGHEST AND LOWEST CORRELATION BETWEEN STOCKS :

BETWEEN
STOCKS		 Monthly return
correlation coefficients
RIO & ANZ 0.62
RIO & WES 0.76
RIO & TLS -0.69
ANZ & WES 0.60
ANZ & TLS -0.19
TLS & WES -0.52

HIGHEST CORRELATION IS BETWEEN RIO & WES stocks i.e 0.76 & lowest correlation is between RIO & TLS stocks i.e -0.69.
BETWEEN INDEX
& STOCK		 correlation
coefficients
AORD & RIO 0.78
ANZ & AORD 0.84
AORD & WES 0.89
AORD & TLS -0.40
HIGHEST CORRELATION IS BETWEEN Index AORD is with WES stock i.e 0.89 & lowest correlation is between AORD & TTLS stock i.e -0.40.

jeff jeffy answered 4 months ago
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