Question
In: Finance
The table below is the Monthly return Correlation Coefficients between two stocks: RIO & ANZ 0.6162...
The table below is the Monthly return Correlation Coefficients between two stocks:
| RIO & ANZ | 0.6162 |
| RIO & WES | 0.7593 |
| RIO & TLS | -0.6850 |
| ANZ & WES | 0.5970 |
| ANZ & TLS | -0.1865 |
| WES & TLS | -0.5192 |
Required:
a. Which pair of two stocks have the highest and lowest correlations?
b. Suggest some economic reasons to explain the high and low correlation between these stocks. 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
a) The stock pair RIO & TLS have the lowest correlation since they have the most negative value for correlation out of all, while the stock pair RIO & WES have the highest correlation since they have the highest positive value of correlation out of all.
b)
to maximize the benefits of diversification , we should choose stocks with the lowest correlation , i.e. the stock pair RIO &TLS, since a negative correlation between stocks will lead to a lower standard deviation / risk of the portfolio than the individual risk for the stocks.
A change in economy / market trend affects stocks differently , similar types of companies are affected by a market trend more or less in the same way and hence usually have a higher correlation between them.
A change in market for companies in a different line of business usually will not be affected at the same degree and hence the correlation between such stocks will be lower.
jeff jeffy answered 4 months agoRelated Solutions
The table below shows standard deviations and correlation coefficients for seven stocks from different countries. Calculate...
The table below shows standard deviations and correlation
coefficients for seven stocks from different countries. Calculate
the variance of a portfolio with equal investments in each stock.
(Use decimals, not percents, in your calculations. Do not
round intermediate calculations. Round your answer to 4 decimal
places.)
Portfolio Varience:?
BHP Billiton
Siemens
Nestlé
LVMH
Toronto Dominion Bank
Samsung
BP
BHP Billiton
1.00
0.28
0.37
0.40
0.16
0.40
0.14
Siemens
1.00
0.34
0.16
0.14
0.31
–0.12
Nestlé
1.00
0.09
0.10
0.02
0.10...
The table below shows standard deviations and correlation coefficients for eight stocks from different countries. Calculate...
The table below shows standard deviations and correlation
coefficients for eight stocks from different countries. Calculate
the variance of a portfolio with equal investments in each stock.
(Use decimals, not percents, in your calculations. Do not
round intermediate calculations. Round your answer to 5 decimal
places.)
BHP
BP
Fiat
Chrysler
Heineken
Korea
Electric
Nestlè
Sony
Tata Motors
BHP
1.00
.34
.38
.45
.14
.45
.16
.29
BP
.34
1.00
.29
.14
.16
.36
−.07
.12
Fiat
.38
.29
1.00
−.03...
The table below shows standard deviations and correlation coefficients for eight stocks from different countries. Calculate...
The table below shows standard deviations and correlation
coefficients for eight stocks from different countries. Calculate
the variance of a portfolio with equal investments in each stock.
(Use decimals, not percents, in your calculations. Do not
round intermediate calculations. Round your answer to 5 decimal
places.)
BHP
BP
Fiat
Chrysler
Heineken
Korea
Electric
Nestlè
Sony
Tata Motors
BHP
1.00
.26
.42
.40
.17
.40
.12
.34
BP
.26
1.00
.34
.17
.12
.33
.49
.17
Fiat
.42
.34
1.00
.09...
Using excel compute correlation coefficients, correlation matrix and test the significance of the correlation coefficients between...
Using excel compute correlation coefficients, correlation matrix
and test the significance of the correlation coefficients between
sales with price, sales with advertisments using alpha
0.05
Sales
Price
Adver
19.98
14.10
15.19
19.98
18.65
15.19
19.98
18.65
13.87
19.98
18.65
12.83
19.98
18.65
13.16
19.98
18.65
15.19
19.98
18.65
13.92
20.10
18.73
14.42
20.12
18.75
13.83
20.13
18.75
14.50
20.14
18.75
13.87
20.12
18.75
13.64
20.12
13.87
14.31
20.13
14.27
13.85
20.14
18.76
14.20
20.14
18.77
13.64
20.13
13.87
14.33
20.13
14.14...
Calculate the covariance and correlation coefficients by completing the below table, assuming sample data. Show all...
Calculate the covariance and correlation coefficients by
completing the below table, assuming sample data. Show all
workings. (Note: You can calculate the mean and standard deviation
of X & Y with Excel or your calculator; no working for their
calculation is required.)
X
Y
(X - X bar)
(Y - Y bar)
(X - X bar)(Y - Y bar)
5
5
2
3
5
4
8
7
6
9
(b) Comment on the
direction and strength of the association between X...
The table below gives statistics relating to two stocks. Mean Annual Return (%) Standard Deviation of...
The table below gives statistics relating to two stocks.
Mean Annual Return (%)
Standard Deviation of Return (%)
Skewness
Excess
Kurtosis
Stock A
11.5
5.5
-0.45
-0.5
Stock B
12.0
8.5
0.25
2.5
Based on the information in the table, contrast the distribution
of returns of Stock A and B. Evaluate the relative attractiveness
of Stock A and B
true or false 16. If the correlation coefficent between two stocks is 1, then an investor...
true or false
16. If the correlation coefficent between two stocks is 1, then
an investor can signifcantly reduce risk by holding the two stocks
in a portfolio.
18. Investors can reduce risk by holding more than one asset in
a portfolio.
19. A nominal rate could best be described as
the rate that tells you what you really earn on an annual
basis
The rate that you use in calculations
Its hard to say exactly
The stated rate that...
Use the data values in the table below to calculate the correlation, r, between the variables...
Use the data values in the table below to calculate the
correlation, r, between the variables x and y.
x
y
4
12.32
5
13.1
6
16.68
7
20.26
8
22.44
9
22.72
10
23.4
11
26.98
12
28.66
Give your answer to rounded three decimal places.
Calculate the correlation of the two stocks below based on the scenario forecasts given: Probability Atlantis...
Calculate the correlation of the two stocks below based on the
scenario forecasts given:
Probability
Atlantis Co.
Baltazaar Inc.
Boom
0.3
9
14%
Normal
0.6
13
4%
Bust
0.1
-10%
-6%
Provide your answer in decimals, rounded to two decimals.
Assume the rate of return given below are for two stocks listed on the Ghana ...
Assume the rate of return given below are for two stocks listed
on the Ghana
Stock
Exchange (GSE).
Year
Return on stock A
Return on stock B
1
0.2
0.3
2
0.10
0.1
3
0.14
0.18
4
0.05
0.00
5
0.01
-0.08
Calculate the arithmetic average return on the two stocks over
the 5-year period.
Which of the two stocks has a greater dispersion around the
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Calculate the geometric average returns of each stock.
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