The following are the monthly rates of return for Madison Corp. and for Sophie Electric during a six-month period.
Month Madison Corp. Sophie Electric
1 -0.04 0.07
2 0.06 -0.02
3 -0.07 -0.10
4 0.12 0.15
5 -0.02 -0.06
6 0.05 0.02
Compute the following.
Average monthly rate of return Ri for each stock
Standard deviation of returns for each stock
Covariance between the rates of return
The correlation coefficient between the rates of return
What level of correlation did you expect? How did you your expectations compare with the computed correlation? Would these two stocks offer a good chance for diversification? Why or why not?