In: Finance
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Year |
Stock X |
Stock Y |
1 |
8.00% |
5.00% |
2 |
1.00% |
14.00% |
3 |
11.00% |
8.00% |
4 |
4.00% |
12.00% |
What is the correlation of Stock X and Stock Y?
Round to 4 decimal places please.
Stock X
Year AR ER = Avg. R
(AR-ER) (AR-ER)^2
1 8% 6.00% 0.0200
0.000400
2 1% 6.00% -0.0500
0.002500
3 11% 6.00% 0.0500
0.002500
4 4% 6.00% -0.0200
0.000400
Average = 6.00%
0.005800
Stock Y
Year AR ER = Avg. R
(AR-ER) (AR-ER)^2
1 5% 9.75% -0.0475
0.002256
2 14% 9.75% 0.0425
0.001806
3 8% 9.75% -0.0175
0.000306
4 12% 9.75% 0.0225
0.000506
Average = 9.75%
0.004875
Volatility (Std Dev. Of X) =
SQRT((∑(AR-ER)^2) / (n-1))
√(0.0058 /
(4-1))=
0.04396968653
Volatility (Std Dev. Of Y) =
√(0.004875 / (4-1))
0.04031128874
Covariance between stock
Year Stock X (AR - ER)
Stock Y (AR-ER) Stock A (AR - ER) *
Stock B (AR-ER)
0
1 0.0200
-0.0475 -0.000950
2 -0.0500
0.0425 -0.002125
3 0.0500
-0.0175 -0.000875
4 -0.0200
0.0225 -0.000450
-0.004400
Covariance = -0.0044 / (4-1)
-0.001466666667
Correlation = Covariance between stock / (Std. dev. Of X * std.
dev. Of Y)
-0.001466666667 / (0.04396968652*
0.04031128874)
-0.8275
So, Correlation between two stock is -0.8275