If the standard deviation of returns for stock L is 0.27 and for stock M is 0.49 and the covariance between the returns of the two stocks is 0.0144.Which of the following statements is least accurate? Question 38Answera.The correlation between the two stocks is 0.108b.The returns of two stocks have direct relationship with each other.c.The returns of two stocks have indirect relationship with each other
Question
If the standard deviation of returns for stock L is 0.27 and for stock M is 0.49 and the covariance between the returns of the two stocks is 0.0144.Which of the following statements is least accurate? Question 38Answera.The correlation between the two stocks is 0.108b.The returns of two stocks have direct relationship with each other.c.The returns of two stocks have indirect relationship with each other
Solution
The correlation coefficient between two variables can be calculated using the formula:
Correlation = Covariance / (Standard Deviation of X * Standard Deviation of Y)
Let's calculate the correlation between the two stocks using the given values:
Correlation = 0.0144 / (0.27 * 0.49) = 0.108
So, statement a is accurate.
The correlation coefficient ranges from -1 to 1. A positive correlation indicates a direct relationship between the variables, meaning that when one variable increases, the other also increases. A negative correlation indicates an indirect or inverse relationship, meaning that when one variable increases, the other decreases.
Given that the calculated correlation is 0.108, which is a positive value, it indicates a direct relationship between the returns of the two stocks. Therefore, statement b is accurate.
Statement c, which suggests an indirect relationship between the returns of the two stocks, is the least accurate.
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