4 Replies
pawan tewari
( )
(544 Points)
Replied 17 February 2011
two stocks move in same direction when they are positively corelated. Researchers have find that there is positive corelation b/w sens*x and gold i.e., when one goes up other too will move in same direction which is not good at all for construction of portfolio since risk can not be diverted. To lower the risk the coefficient of corelation should be <1.
corelation(r)= covariance of sens*x and gold/SD of sens*x and gold.
where covariance[sens*x(x),gold(y)]=joint variability of x around mean return of sens*x and y around mean return of gold/n-1( unbaised)
pawan tewari
( )
(544 Points)
Replied 17 February 2011
in short remember that due to +ve corelation both moves in same direction, there r other logics too for this concept.
thank you
sonali laha
(CS student)
(136 Points)
Replied 17 February 2011
Thanks Pawan......bt its realy critical to undrstnd......
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