Question

Compute the correlations for the “Hot Growth Companies” in Date 1 for each pair of variables rank, P/E ratio, and return, using the first 50 and second 50 values separately. Compare these results with those given in Example 2.4. Explain the differences.

Date 1

Rank	Return on Capital	P-E Ratio
1	51.5	37
2	68.5	53
3	35.3	71
4	28.7	21
5	28.2	26
6	29.8	14
7	24.4	36
8	27.4	38
9	32.3	24
10	35.1	37
11	32.5	26
12	15.9	36
13	18.5	47
14	15	22
15	22.3	13
16	17.2	26
17	21.2	24
18	13.5	19
19	30.3	48
20	21.2	27
21	14.1	50
22	26.7	55
23	16.1	23
24	20.3	33
25	21.2	15
26	18.3	14
27	30.6	22
28	16.6	34
29	15.7	7
30	13.4	42
31	28.2	18
32	11.2	45
33	17.3	26
34	19.9	27
35	19.6	17
36	16.7	11
37	13.1	41
38	17.8	43
39	17.7	28
40	14.5	52
41	15.2	22
42	8.9
43	14.7	31
44	12	19
45	10.9	19
46	14.8	22
47	15.9	11
48	12.9	38
49	21.8	21
50	12.1	30
51	8.5	25
52	18.6	25
53	12.1	22
54	15.1	21
55	17.9	15
56	9	25
57	11	29
58	18.1	24
59	6.3	30
60	15.1	23
61	15.9	22
62	15.8	19
63	18.9	23
64	12.7	18
65	15.1	28
66	8.7	29
67	15.1	25
68	15.5	14
69	12.6	17
70	7.6	24
71	7.5	43
72	13.4	28
73	7.4	14
74	15.6	26
75	11.5	25
76	10	31
77	8.6	15
78	14	31
79	12.9	20
80	10.4	16
81	12.2	19
82	9.3	32
83	12.6	21
84	12.5	26
85	13	39
86	15.8	32
87	14.4	28
88	10.6	16
89	12.2	31
90	11.4	13
91	11.7	6
92	12.3	37
93	12.3	29
94	14.5	20
95	13	28
96	14	23
97	10.6	30
98	11	21
99	10.4	31
100	11.1	29

Example 2.4

Rank	Return on Capital	P-E Ratio
1	51.5	37			Rank	Return on Capital	P-E Ratio
2	68.5	53		Rank	1
3	35.3	71		Return on Capital	-0.647	1
4	28.7	21		P-E Ratio	-0.267	0.306	1
5	28.2	26
6	29.8	14
7	24.4	36		This file shows the Excel verison of the example 2.4 in the book.
8	27.4	38
9	32.3	24
10	35.1	37
11	32.5	26
12	15.9	36
13	18.5	47
14	15	22
15	22.3	13
16	17.2	26
17	21.2	24
18	13.5	19
19	30.3	48
20	21.2	27
21	14.1	50
22	26.7	55
23	16.1	23
24	20.3	33
25	21.2	15
26	18.3	14
27	30.6	22
28	16.6	34
29	15.7	7
30	13.4	42
31	28.2	18
32	11.2	45
33	17.3	26
34	19.9	27
35	19.6	17
36	16.7	11
37	13.1	41
38	17.8	43
39	17.7	28
40	14.5	52
41	15.2	22
42	8.9
43	14.7	31
44	12	19
45	10.9	19
46	14.8	22
47	15.9	11
48	12.9	38
49	21.8	21
50	12.1	30
51	8.5	25
52	18.6	25
53	12.1	22
54	15.1	21
55	17.9	15
56	9	25
57	11	29
58	18.1	24
59	6.3	30
60	15.1	23
61	15.9	22
62	15.8	19
63	18.9	23
64	12.7	18
65	15.1	28
66	8.7	29
67	15.1	25
68	15.5	14
69	12.6	17
70	7.6	24
71	7.5	43
72	13.4	28
73	7.4	14
74	15.6	26
75	11.5	25
76	10	31
77	8.6	15
78	14	31
79	12.9	20
80	10.4	16
81	12.2	19
82	9.3	32
83	12.6	21
84	12.5	26
85	13	39
86	15.8	32
87	14.4	28
88	10.6	16
89	12.2	31
90	11.4	13
91	11.7	6
92	12.3	37
93	12.3	29
94	14.5	20
95	13	28
96	14	23
97	10.6	30
98	11	21
99	10.4	31
100	11.1	29

Answer 1

For first 50 values :

	Rank	Return on Capital	P-E Ratio
Rank	1
Return on Capital	-0.66251	1
P-E Ratio	-0.2415	0.273598	1

For second 50 values :

	Rank	Return on Capital	P-E Ratio
Rank	1
Return on Capital	-0.19337	1
P-E Ratio	0.120885	-0.14055	1

There is moderate negative correlation between rank and return on capital for first 50 values. Whereas, there is weak negative correlation between rank and return on capital for second 50 values.

There is weak negative correlation between rank and P-E Ratio for first 50 values. Whereas, there is weak positive correlation between rank and P-E ratio for second 50 values.

There is weak positive correlation between return on capital and P-E Ratio for first 50 values. Whereas, there is weak negative correlation between return on capital and P-E ratio for second 50 values.

We can see that first 50 values are representative of all values since correlation values for first 50 values are close to correlation values for all values. Whereas, second 50 values have different correlation values than all values.