Question

Given that the returns of stocks X and Y are essentially uncorrelated, which three statements are true?

The standard deviations of their historical returns are almost identical

Their beta is close to zero

Their rho is close to zero

One of the two is a bond, and the other is a stock.

The behaviour of Y cannot be well predicted from the behaviour of X

Answer 1

Correlation is the measure of the direction of movement of returns of the two assets with the changes in the market or the economy. So the options related to beta and standard deviation are ruled out because these are the measures of risk not return.

Rho is the symbol of correlation and it ranges between -1 to 1 implies perfect positive correlation and -1 implies perfect negative correlation while 0 implies no correlation. So if x and y have uncorrelated returns then rho is close to zero. so this is the right answer.

Nothing can be said conclusively about the nature of the two stocks and the fact that it is given that both are stocks, so neither 1 can be a bond. As they are uncorrelated, their behavious cant be preducted by the behaviour of each other.