Correlation is the degree to which the returns of two stocks share common risks.

Question

Quizplus · Accepted Answer

Correlation measures the relationship or association between two variables, in this case the returns of two stocks, and specifically looks at the degree to which they move in relation to each other. If two stocks have a high positive correlation, it means that when one stock's return increases or decreases, the other stock's return tends to do the same. This indicates that they share common risk factors, such as market conditions, industry trends, or economic events. Conversely, if two stocks have a low or negative correlation, their returns have less of a relationship and are influenced by different factors.

Correlation Is the Degree to Which the Returns of Two