The annual standard deviation of returns on Stock A’s equity is 31% and the corr

Question

The annual standard deviation of returns on Stock A’s equity is 31% and the correlation coefficient of these returns, with those on the market index (S&P 500 index), is 0.82. Comparable numbers of Stock B are 34% and 0.64.

Which stock is riskier? Why?

What can you say about Stock A if its correlation coefficient is 0

What can you say about Stock A if its correlation coefficient is -1

What can you say about Stock A if its correlation coefficient is 1

Assume the standard deviation for the market index (S&P 500 index) is 25%, what are betas of stock A and for stock B.

Interpret the betas of stock A and stock B you compute in part e

Explanation / Answer

Ans

Ans 1 Stock A Stock B Std Deviation 31% 34% Coefficient of variation with Market 0.82 0.64 Std Deviation along with Market 25% 22% Stock A is more riskier ,since it has more no-diversifiable risk Ans 2 "Zero" Correlation coeffient indicates no linear relationship beween Stock and the market. Ans 3 "-1" indicated that risk is perfect negative correlation with market. Moves in opposite direction to market. Ans 4 "1" indicated that risk is perfect positve correlation with market. Moves in exactly in tandem with the market. Risk is non-diversifiable

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