Test: Exam 1 - Chap 1 to4 22 of 26 (20 complete)v Suppose the data represent the

Question

Test: Exam 1 - Chap 1 to4 22 of 26 (20 complete)v Suppose the data represent the annual rates of return for various stocks. Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2.024 -1.116 -0.588-0.072 0.172 0038 0553 -1,173 -2212 2.7 1.639 1.167 0605 0.543 0.48 1.1211804 2.597 If you only wish to invest in two of the stocks, which two would you selecd f your goal is to have one stock go up when tho other ges dowm? If you only wish Choose the best pair below OA, Aand B O B. A and C O C. B and C Click to select your answer

Explanation / Answer

To select a pair of stock such that one goes up when other goes down, we need to find correlation between the pairs. Pair with negative correlation will support us in specifying the answer.

Correlation between the pairs are computed as ;

> cor(a,b)
0.3637455
> cor(a,c)
-0.4164503
> cor(b,c)
-0.9938084

Correlation between the pairs (a,c) and (b,c) are negative but (b,c) has more negative correlation which can be considered perfect under our consideration.

Thus, the answer is

(C) b and c

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