The table below is the Monthly return Correlation Coefficients between two stocks: RIO & ANZ 0.6162 RIO & WES 0.7593 RIO...

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The table below is the Monthly return Correlation Coefficientsbetween two stocks:
RIO & ANZ 0.6162
RIO & WES 0.7593
RIO & TLS -0.6850
ANZ & WES 0.5970
ANZ & TLS -0.1865
WES & TLS -0.5192
Required:
a. Which pair of two stocks have the highest and lowestcorrelations?
b. Suggest some economic reasons to explain the high and lowcorrelation between these stocks. If you were to form a portfolioof two stocks, which ones would you choose to maximise the benefitsof diversification? Give reasons for your answer.

Answer & Explanation Solved by verified expert

3.9 Ratings (676 Votes)

a The stock pair RIO TLS have the lowest correlation since they have the most negative value for correlation out of all while the stock pair RIO WES have the highest correlation See Answer

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RIO & ANZ	0.6162
RIO & WES	0.7593
RIO & TLS	-0.6850
ANZ & WES	0.5970
ANZ & TLS	-0.1865
WES & TLS	-0.5192