Given the following forecasts for a portfolio that has $1,500 invested in Stock A and $4,500 invested in Stock B, what is the correlation between the two stocks?

A)-0.99
B)0
C)0.99
D)-1.00

Question

Given the following forecasts for a portfolio that has $1,500 invested in Stock A and $4,500 invested in Stock B, what is the correlation between the two stocks?

A)-0.99 
B)0 
C)0.99 
D)-1.00

Quizplus · Accepted Answer

The correlation coefficient ranges between -1 and 1, with 0 indicating no correlation and -1 or 1 indicating a perfect negative or positive correlation, respectively. Looking at the forecasted returns for both stocks, we can see that they are moving in the same direction (both positive or both negative) in all instances except for one, where Stock A has a negative forecast and Stock B has a positive forecast. This indicates a strong positive correlation between the two stocks. A correlation coefficient of 0.99 indicates a very strong positive correlation, making choice C the best answer.

Given the Following Forecasts for a Portfolio That Has $1,500