Problem 1. As a new analyst, you have calculated the following annual rates of return for both Lauren Corporation and Kayleigh Industries.
Year Lauren's Rate of Return Kayleigh's Rate of Return
1996 5 5
1997 12 15
1998 -11 5
1999 10 7
2000 12 -10
Your manager suggests that because these companies produce similar products, you should continue your analysis by computing their covariance. Show all calculations.
Problem: # 2. You decide to go an extra step by calculating the coefficient of correlation using the data provided in Problem 1. Prepare a table showing your calculations and explain how to interpret the results. Would the combination of Lauren and Kayleigh be good for diversification? Explain how to interpret the results. Would the combination of Lauren and Kayleigh be good for diversification?