^AORD RIO ANZ WES TLS Date Adj Close Adj Close Adj Close Adj Close Adj Close 31/1/13 5120.4 66.36 19.84806 19.57102 3.212754 28/2/13 4979.9 67.05 19.71675 19.69255 3.255187 31/3/13 5168.6 57.2 22.00425 21.24546 3.594419 30/4/13 4914 55.8 19.03257 19.22232 3.421195 31/5/13 4775.4 55.18 20.2205 19.39867 3.442847 30/6/13 5035.7 52.37 21.05536 19.86891 3.601637 31/7/13 5125.3 57.51 21.00583 19.91794 3.536677 31/8/13 5217.7 58.3 21.77701 20.86289 3.688453 30/9/13 5420.3 61.74 23.94198 21.79624 3.844303 31/10/13 5314.3 63.99 22.56942 21.50087 3.755246 30/11/13 5353.1 66.06 23.43381 22.06193 3.896254 31/12/13 5205.1 68.18 21.90694 21.04004 3.814618 31/1/14 5415.4 65.64 23.36837 21.51595 3.747824 28/2/14 5403 66.84 24.03729 21.20243 3.877173 31/3/14 5470.8 63.55 25.06247 21.98485 3.984024 30/4/14 5473.8 61.7 24.34993 22.31941 4.075611 31/5/14 5382 59.3 24.85111 21.53699 3.976392 30/6/14 5623.1 59.31 25.32071 22.65917 4.190094 31/7/14 5624.6 66.38 24.9182 22.29369 4.24352 31/8/14 5296.8 62.63 23.04729 22.42818 4.153627 30/9/14 5505 59.58 24.97038 23.48155 4.412249 31/10/14 5298.1 60.41 23.79267 21.65335 4.459271 30/11/14 5388.6 59.1 24.61535 21.98998 4.678707 31/12/14 5551.6 58 25.31339 22.9756 5.09407 31/1/15 5898.5 57.56 27.10834 23.1127 4.992188 28/2/15 5861.9 64.41 28.10554 23.80803 5.060349 31/3/15 5773.7 57.23 26.07279 23.67265 4.996192 30/4/15 5774.9 57.15 25.45914 23.64556 4.988173 31/5/15 5451.2 58.2 25.36044 21.13805 4.924016 30/6/15 5681.7 53.75 25.73849 22.99026 5.204701 31/7/15 5222.1 52.86 21.99743 22.02082 4.627292 31/8/15 5058.6 50.29 21.32798 22.10167 4.620785 30/9/15 5288.6 48.6 21.43036 22.20873 4.447815 31/10/15 5218.2 50.65 21.3831 21.46487 4.414868 30/11/15 5344.6 45.91 22.81056 23.44851 4.620785 31/12/15 5056.6 44.71 19.74792 23.76406 4.637259 31/1/16 4947.9 39.13 18.29418 22.02842 4.324265 29/2/16 5151.8 40.28 19.15989 24.12315 4.390159 31/3/16 5316 42.69 19.82142 24.89136 4.549177 30/4/16 5447.8 51.55 20.80963 23.64598 4.744384 31/5/16 5310.4 44.69 20.34638 23.33752 4.718923 30/6/16 5644 45.5 21.79728 24.9845 4.897155 31/7/16 5529.4 49.56 22.69144 24.69935 4.464305 31/8/16 5525.2 47.6 23.30722 26.4623 4.524136 30/9/16 5402.4 51.61 23.49281 24.60811 4.34946 31/10/16 5502.4 54.18 23.96519 25.07016 4.410597 30/11/16 5719.1 57.75 26.40722 25.28618 4.454266 31/12/16 5675 59.9 25.42628 24.15813 4.366928 31/1/17 5761 66.68 26.8239 25.63424 4.209718 28/2/17 5903.8 61.99 27.62254 27.98426 4.069976 31/3/17 5947.6 60.46 28.43854 26.69895 3.808148 30/4/17 5761.3 60.44 24.31513 26.51268 3.970581 31/5/17 5764 62.81 25.59965 24.91076 3.880341 30/6/17 5773.9 63.27 26.41078 25.28949 3.699859 31/7/17 5776.3 65.79 26.20577 26.46303 3.311826 31/8/17 5744.9 67.84 26.38404 26.71963 3.281864 30/9/17 5976.4 66.53 26.66927 27.0235 3.328882 31/10/17 6057.2 69.45 25.3679 28.39412 3.225442 30/11/17 6167.3 70.95 26.31148 28.71733 3.413514 31/12/17 6146.5 75.81 26.165 28.32299 3.451129 31/1/18 6117.3 76.85 26.59529 26.71963 3.150213 28/2/18 5868.9 81.16 24.59034 27.81488 3.017585 31/3/18 6071.6 72.7 24.57203 29.29397 3.056025 30/4/18 6123.5 79.86 24.91077 30.49197 2.69084 31/5/18 6289.7 82.97 26.60997 33.03524 2.517857 30/6/18 6366.2 83.44 27.60878 33.1021 2.72928 31/7/18 6427.8 81.2 27.79724 34.43402 2.979144 31/8/18 6325.5 72.74 26.55343 34.4696 3.139685 30/9/18 5913.3 78.76 24.4333 32.23617 3.03142 31/10/18 5749.3 76.4 25.25308 30.69307 2.883785 30/11/18 5709.4 73.28 23.74844 31.30518 2.805047 31/12/18 5937.3 78.47 24.30186 31.29546 3.060946 31/1/19 6252.7 87.05 27.18546 32.23792 3.080631 28/2/19 6261.7 96.16 25.27276 34.65 3.32 31/3/19 6418.4 97.91 26.40873 36.01 3.38 30/4/19 6491.8 95.37 27.06895 37.05 3.65 31/5/19 6699.2 100.3 28.21 36.16 3.85 Using historical prices of the Australian All Ordinaries Index (AORD) and...

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^AORD RIO ANZ WES TLS
Date Adj Close Adj Close Adj Close Adj Close Adj Close
31/1/13 5120.4 66.36 19.84806 19.57102 3.212754
28/2/13 4979.9 67.05 19.71675 19.69255 3.255187
31/3/13 5168.6 57.2 22.00425 21.24546 3.594419
30/4/13 4914 55.8 19.03257 19.22232 3.421195
31/5/13 4775.4 55.18 20.2205 19.39867 3.442847
30/6/13 5035.7 52.37 21.05536 19.86891 3.601637
31/7/13 5125.3 57.51 21.00583 19.91794 3.536677
31/8/13 5217.7 58.3 21.77701 20.86289 3.688453
30/9/13 5420.3 61.74 23.94198 21.79624 3.844303
31/10/13 5314.3 63.99 22.56942 21.50087 3.755246
30/11/13 5353.1 66.06 23.43381 22.06193 3.896254
31/12/13 5205.1 68.18 21.90694 21.04004 3.814618
31/1/14 5415.4 65.64 23.36837 21.51595 3.747824
28/2/14 5403 66.84 24.03729 21.20243 3.877173
31/3/14 5470.8 63.55 25.06247 21.98485 3.984024
30/4/14 5473.8 61.7 24.34993 22.31941 4.075611
31/5/14 5382 59.3 24.85111 21.53699 3.976392
30/6/14 5623.1 59.31 25.32071 22.65917 4.190094
31/7/14 5624.6 66.38 24.9182 22.29369 4.24352
31/8/14 5296.8 62.63 23.04729 22.42818 4.153627
30/9/14 5505 59.58 24.97038 23.48155 4.412249
31/10/14 5298.1 60.41 23.79267 21.65335 4.459271
30/11/14 5388.6 59.1 24.61535 21.98998 4.678707
31/12/14 5551.6 58 25.31339 22.9756 5.09407
31/1/15 5898.5 57.56 27.10834 23.1127 4.992188
28/2/15 5861.9 64.41 28.10554 23.80803 5.060349
31/3/15 5773.7 57.23 26.07279 23.67265 4.996192
30/4/15 5774.9 57.15 25.45914 23.64556 4.988173
31/5/15 5451.2 58.2 25.36044 21.13805 4.924016
30/6/15 5681.7 53.75 25.73849 22.99026 5.204701
31/7/15 5222.1 52.86 21.99743 22.02082 4.627292
31/8/15 5058.6 50.29 21.32798 22.10167 4.620785
30/9/15 5288.6 48.6 21.43036 22.20873 4.447815
31/10/15 5218.2 50.65 21.3831 21.46487 4.414868
30/11/15 5344.6 45.91 22.81056 23.44851 4.620785
31/12/15 5056.6 44.71 19.74792 23.76406 4.637259
31/1/16 4947.9 39.13 18.29418 22.02842 4.324265
29/2/16 5151.8 40.28 19.15989 24.12315 4.390159
31/3/16 5316 42.69 19.82142 24.89136 4.549177
30/4/16 5447.8 51.55 20.80963 23.64598 4.744384
31/5/16 5310.4 44.69 20.34638 23.33752 4.718923
30/6/16 5644 45.5 21.79728 24.9845 4.897155
31/7/16 5529.4 49.56 22.69144 24.69935 4.464305
31/8/16 5525.2 47.6 23.30722 26.4623 4.524136
30/9/16 5402.4 51.61 23.49281 24.60811 4.34946
31/10/16 5502.4 54.18 23.96519 25.07016 4.410597
30/11/16 5719.1 57.75 26.40722 25.28618 4.454266
31/12/16 5675 59.9 25.42628 24.15813 4.366928
31/1/17 5761 66.68 26.8239 25.63424 4.209718
28/2/17 5903.8 61.99 27.62254 27.98426 4.069976
31/3/17 5947.6 60.46 28.43854 26.69895 3.808148
30/4/17 5761.3 60.44 24.31513 26.51268 3.970581
31/5/17 5764 62.81 25.59965 24.91076 3.880341
30/6/17 5773.9 63.27 26.41078 25.28949 3.699859
31/7/17 5776.3 65.79 26.20577 26.46303 3.311826
31/8/17 5744.9 67.84 26.38404 26.71963 3.281864
30/9/17 5976.4 66.53 26.66927 27.0235 3.328882
31/10/17 6057.2 69.45 25.3679 28.39412 3.225442
30/11/17 6167.3 70.95 26.31148 28.71733 3.413514
31/12/17 6146.5 75.81 26.165 28.32299 3.451129
31/1/18 6117.3 76.85 26.59529 26.71963 3.150213
28/2/18 5868.9 81.16 24.59034 27.81488 3.017585
31/3/18 6071.6 72.7 24.57203 29.29397 3.056025
30/4/18 6123.5 79.86 24.91077 30.49197 2.69084
31/5/18 6289.7 82.97 26.60997 33.03524 2.517857
30/6/18 6366.2 83.44 27.60878 33.1021 2.72928
31/7/18 6427.8 81.2 27.79724 34.43402 2.979144
31/8/18 6325.5 72.74 26.55343 34.4696 3.139685
30/9/18 5913.3 78.76 24.4333 32.23617 3.03142
31/10/18 5749.3 76.4 25.25308 30.69307 2.883785
30/11/18 5709.4 73.28 23.74844 31.30518 2.805047
31/12/18 5937.3 78.47 24.30186 31.29546 3.060946
31/1/19 6252.7 87.05 27.18546 32.23792 3.080631
28/2/19 6261.7 96.16 25.27276 34.65 3.32
31/3/19 6418.4 97.91 26.40873 36.01 3.38
30/4/19 6491.8 95.37 27.06895 37.05 3.65
31/5/19 6699.2 100.3 28.21 36.16 3.85
Using historical prices of the Australian All Ordinaries Index(AORD) and the following four companies traded on the AustralianStock Exchange: Rio Tinto Limited (RIO.AX), ANZ Ltd (ANZ.AX),Wesfarmers Ltd (WES.AX) and Telstra Corp. (TLS.AX) provided above,answer the following questions:
1. Compute the monthly return correlation coefficients betweeneach pair of two stocks and between each stock and the marketindex. which pair of stock has the highest and lowest correlation?Which stock (s) has the highest and lowest correlations with themarket?
Hint: use Excel function CORREL() to compute the correlationcoefficient between two data series.
1.1. Can you suggest some economic reasons to explain the highand low correlation between stocks in (1)? If you were to form aportfolio of two stocks, which ones would you choose to maximisethe benefits of diversification? Give reasons for your answer.

Answer & Explanation Solved by verified expert

3.7 Ratings (291 Votes)

BETWEEN STOCKS Monthly return correlation coefficients RIO ANZ 062 RIO WES 076 RIO TLS 069 AORD RIO 078 ANZ WES 060 ANZ TLS 019 ANZ See Answer

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	^AORD	RIO	ANZ	WES	TLS
Date	Adj Close	Adj Close	Adj Close	Adj Close	Adj Close
31/1/13	5120.4	66.36	19.84806	19.57102	3.212754
28/2/13	4979.9	67.05	19.71675	19.69255	3.255187
31/3/13	5168.6	57.2	22.00425	21.24546	3.594419
30/4/13	4914	55.8	19.03257	19.22232	3.421195
31/5/13	4775.4	55.18	20.2205	19.39867	3.442847
30/6/13	5035.7	52.37	21.05536	19.86891	3.601637
31/7/13	5125.3	57.51	21.00583	19.91794	3.536677
31/8/13	5217.7	58.3	21.77701	20.86289	3.688453
30/9/13	5420.3	61.74	23.94198	21.79624	3.844303
31/10/13	5314.3	63.99	22.56942	21.50087	3.755246
30/11/13	5353.1	66.06	23.43381	22.06193	3.896254
31/12/13	5205.1	68.18	21.90694	21.04004	3.814618
31/1/14	5415.4	65.64	23.36837	21.51595	3.747824
28/2/14	5403	66.84	24.03729	21.20243	3.877173
31/3/14	5470.8	63.55	25.06247	21.98485	3.984024
30/4/14	5473.8	61.7	24.34993	22.31941	4.075611
31/5/14	5382	59.3	24.85111	21.53699	3.976392
30/6/14	5623.1	59.31	25.32071	22.65917	4.190094
31/7/14	5624.6	66.38	24.9182	22.29369	4.24352
31/8/14	5296.8	62.63	23.04729	22.42818	4.153627
30/9/14	5505	59.58	24.97038	23.48155	4.412249
31/10/14	5298.1	60.41	23.79267	21.65335	4.459271
30/11/14	5388.6	59.1	24.61535	21.98998	4.678707
31/12/14	5551.6	58	25.31339	22.9756	5.09407
31/1/15	5898.5	57.56	27.10834	23.1127	4.992188
28/2/15	5861.9	64.41	28.10554	23.80803	5.060349
31/3/15	5773.7	57.23	26.07279	23.67265	4.996192
30/4/15	5774.9	57.15	25.45914	23.64556	4.988173
31/5/15	5451.2	58.2	25.36044	21.13805	4.924016
30/6/15	5681.7	53.75	25.73849	22.99026	5.204701
31/7/15	5222.1	52.86	21.99743	22.02082	4.627292
31/8/15	5058.6	50.29	21.32798	22.10167	4.620785
30/9/15	5288.6	48.6	21.43036	22.20873	4.447815
31/10/15	5218.2	50.65	21.3831	21.46487	4.414868
30/11/15	5344.6	45.91	22.81056	23.44851	4.620785
31/12/15	5056.6	44.71	19.74792	23.76406	4.637259
31/1/16	4947.9	39.13	18.29418	22.02842	4.324265
29/2/16	5151.8	40.28	19.15989	24.12315	4.390159
31/3/16	5316	42.69	19.82142	24.89136	4.549177
30/4/16	5447.8	51.55	20.80963	23.64598	4.744384
31/5/16	5310.4	44.69	20.34638	23.33752	4.718923
30/6/16	5644	45.5	21.79728	24.9845	4.897155
31/7/16	5529.4	49.56	22.69144	24.69935	4.464305
31/8/16	5525.2	47.6	23.30722	26.4623	4.524136
30/9/16	5402.4	51.61	23.49281	24.60811	4.34946
31/10/16	5502.4	54.18	23.96519	25.07016	4.410597
30/11/16	5719.1	57.75	26.40722	25.28618	4.454266
31/12/16	5675	59.9	25.42628	24.15813	4.366928
31/1/17	5761	66.68	26.8239	25.63424	4.209718
28/2/17	5903.8	61.99	27.62254	27.98426	4.069976
31/3/17	5947.6	60.46	28.43854	26.69895	3.808148
30/4/17	5761.3	60.44	24.31513	26.51268	3.970581
31/5/17	5764	62.81	25.59965	24.91076	3.880341
30/6/17	5773.9	63.27	26.41078	25.28949	3.699859
31/7/17	5776.3	65.79	26.20577	26.46303	3.311826
31/8/17	5744.9	67.84	26.38404	26.71963	3.281864
30/9/17	5976.4	66.53	26.66927	27.0235	3.328882
31/10/17	6057.2	69.45	25.3679	28.39412	3.225442
30/11/17	6167.3	70.95	26.31148	28.71733	3.413514
31/12/17	6146.5	75.81	26.165	28.32299	3.451129
31/1/18	6117.3	76.85	26.59529	26.71963	3.150213
28/2/18	5868.9	81.16	24.59034	27.81488	3.017585
31/3/18	6071.6	72.7	24.57203	29.29397	3.056025
30/4/18	6123.5	79.86	24.91077	30.49197	2.69084
31/5/18	6289.7	82.97	26.60997	33.03524	2.517857
30/6/18	6366.2	83.44	27.60878	33.1021	2.72928
31/7/18	6427.8	81.2	27.79724	34.43402	2.979144
31/8/18	6325.5	72.74	26.55343	34.4696	3.139685
30/9/18	5913.3	78.76	24.4333	32.23617	3.03142
31/10/18	5749.3	76.4	25.25308	30.69307	2.883785
30/11/18	5709.4	73.28	23.74844	31.30518	2.805047
31/12/18	5937.3	78.47	24.30186	31.29546	3.060946
31/1/19	6252.7	87.05	27.18546	32.23792	3.080631
28/2/19	6261.7	96.16	25.27276	34.65	3.32
31/3/19	6418.4	97.91	26.40873	36.01	3.38
30/4/19	6491.8	95.37	27.06895	37.05	3.65
31/5/19	6699.2	100.3	28.21	36.16	3.85