Question: The following questions are related to correlation of stock returns.
a. What does correlation coefficient measure? Describe the meaning of the following values of correlation coefficient:
a) -1
b) +1
c) between 0 and +1
d) between -1 and 0.
b. Explain why it is important for stock investors to understand correlations between stock returns. More specifically, explain how correlations between stock returns affect the standard deviation (i.e. risk) of a portfolio.