What level of correlation did you expect? How did your expectations compare with the computed correlation?

The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six-month period.

Month                            Madison Cookies                               Sophie Electric

1                                           -0.04                                                      0.07

2                                            0.06                                                     -0.02

3                                           -0.07                                                     -0.10

4                                            0.12                                                       0.15

5                                           -0.02                                                     -0.06

6                                            0.05                                                       0.02

Compute the following.

  1. Average monthly rate of return for each stock
  2. Standard deviation of returns for each stock
  3. Covariance between the rates of return
  4. The correlation coefficient between the rates of return

What level of correlation did you expect? How did your expectations compare with the computed correlation? Would these two stocks be good choices for diversification? Why or why not?

 

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