Question

Which of the following is a FALSE statement of the correlation coefficient?

Select one:

a. The closer the value of the correlation coefficient is to negative one, the weaker the relationship between the returns on the two securities.

b. The closer the absolute value of the correlation coefficient is to zero, the weaker the relationship between the returns on the two securities.

c. Positive correlation coefficients imply that the returns on Security A tend to move in the same direction as those on security B.

d. Negative correlation coefficients imply that the returns on Security A tend to move in the opposite direction to those on security B.

e. It measures how security returns move in relation to one another.

Answer 1

The correlation of 1 means that there is a strong positive relationship between returns of two different securities.

The correlation of -1 means that there is strong negative relation between returns of two securities.

Correlation of zero means where is a weakest relationship between returns of two variables.

So statement (A ) would be false, because the closer the value of correlation coefficient to the negative one, there is a high negative correlation between return of two securities. It does not reflect a weak relationship between two security, instead it reflects a strong negative relationship. It means if security A will move in One direction the security B will move in another direction.

Rest of the statements are true because they reflect the correct correlation between return of two variables.

Show the correct answer would be option ( A).