Using the following guidelines, choose the stocks -A, B and C-- of three firms that have been public for the last 10 years. Stock A should be one you are interested in buying; stock B should be a stock in the same line of business or industry that you feel will have highest possible return correlation with stock A. Stock C should be one you feel will have the lowest correlation with stock A.
a. Calculate the annual rates of return for each of the past 10 years of each stock.
b. Plot the annual return values for each of the stock on the same set of axes, where x-axis is the year and y-axis is annual return in percentage terms.
c. Join the joints for the returns for each stock on the graph. Evaluate and describe the returns of stock A and B in the graph. Did they exhibit the expected positive correlation? Why or why not?
d. Evaluate and describe the relationship of returns of stock A and C in the graph. Did they exhibit a negative correlation? Why or why not?
e. Compare and contrast your findings in part c and d to the expected relationships among stocks A, B and C. discuss your findings.