Sam invests $1K in Stock X. Sally invests $1K in Stock Y. The performance of each is shown. Would you say the correlation between returns is positive or negative?
I would say the correlation of returns is close to zero to slightly negative over the whole term. A sliding correlation would give a positive number in the beginning, give a very negative number in the middle and give a positive number again at the end. I am not sure what Cointegration would say... nitro
Look up the definition of correlation and calculate it. You will then know. No need to ask for another guy's guess.
Aha! Afraid to guess, eh? My guess was way off! Thanks to all who participated. For the answer, check out: http://www.gummy-stuff.org/perfect-correlation.htm#QUESTION
Its a measure of the relationship of the returns not the prices themselves try working out the correlation of the prices and it will be 90%
Bingo... The concept of correlation is very simple. A value of -1 implies that 2 items have an inverse relationship, when 1 item has a positive change, the other has a negative change. A value of +1 implies that 2 items have a similar relationship, when 1 item has a positive change, the other also has a positive change. The range between -1 and +1 is the degrees to which the pair are either inverse related or proportionately related. The chart is definitely misleading, it shows correlation of the returns as opposed to the stock price which is in fact what is plotted. It is certain that the two assets have strong positive correlation with regard to its price.
And if they both have a positive change. Can the correlation be -1? You'll have noticed that the question explicitly refers to the "correlation between returns".
this result is for monthly (or given time period) % change and not for stocks or total return action. So they comparing correlation between +100% and -40% (time period #3) , of course it will be close to -100