This preview shows page 1. Sign up to view the full content.
Unformatted text preview: correlation coefficient always lies between -1 and +1. If r is negative then an increase in X would result in decrease in Y while if r is positive an increase in X is would amount to increase in Y. if two variables are perfectly positively correlated then r=1, while if two stocks are perfectly negatively correlated then r = -1. Larger correlation coefficients like 0.7, 0.9 would reflect stronger correlation while smaller number like 0.2 will reflect weaker correlation between 2 variables. One application of correlation coefficient is while deciding portfolio of stocks to be invested in order to explore the benefits of diversification. For example while deciding the portfolio one may opt for two stocks which are negatively correlated i.e. if price of one stock goes up the price of the other drops, or for a positively correlated stocks. Lower the correlation greater is the risk reduction. Generally a negatively correlated stock saves one during the recessionary trends....
View Full Document
This note was uploaded on 02/05/2012 for the course ACCT 305 taught by Professor Charlie during the Spring '11 term at University of Phoenix.
- Spring '11