Correlation coefficient is “a standardized measure of the relationship between two variables that ranges from -1.00 to +1.00. (Brown and Reilly, 2009, p1016) It is a statistical concept.
a) At the first occasion, I have to refer in two assets which have a high positive Correlation. In other words, if an upward (increasing) or downward (decreasing) movement in one asset tends to be accompanied by an upward or downward shift to the other asset as well. For instance, FTSE100 has a high positive Correlation with FTSE350. According to Levy, H. and Post, T. (2005) the correlation between these two indices is 0.95 (p.194). This occurs due to the fact that these two assets are from the same market sector. In addition, 100 of the 350 stocks are the same. Hence, if there is a significant rise or reduction at the price of bonds for FTSE100, the same shifts they will occur for FTSE350 bonds as well. Due to this fact, the correlation coefficient is definitely high.
b) On the other hand, when an upward or downward movement in one stock tends to be followed by a slightly upward or downward shift in other stock, is referred that they have positive low Correlation. For instance, Barclays and O2 are two companies which I personally believe that they have positive low Correlation. First of all, my opinion is based to the fact that Barclays is a bank company and O2 is a telecommunications company. Therefore, they are two companies which belong into two different market sectors, they are non-competitive companies. As a result, the coefficient correlation between these two businesses is low positive correlation. According to Levy, H. and Post, T. (2005) mean-variance theory is “evaluation of investment strategies based on the exp...
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...rstand. They try to follow an index –typically the FTSE All-Share or FTSE 100—which measures the performance of all or part of the stock market. If the market does well, the tracker does well. If it does badly the tracker does badly”. (p.386). In other words, it is a collective investment way to follow the performance of a specific index. In addition, the most important advantage of these funds is that are cheap due to the fact that they just do what the market does and the managers do not have to invest at any big bets to outperform them. Moreover, I personally believe that “Index Tracker Funds” are appropriate assets for those who believe that CAPM and its assumptions are correct.
d) Nowadays, is generally consider that CAPM model has some disadvantages and limitations, hence for investors it might be an unsatisfactory model.
... Capital, Corporation Finance and the Theory of Investment", The American Economic Review, vol. 48, no. 3, pp. 261-297.
I would say there is a disconnect between the stock prices and the U.S economy because the unemployment rate is high, interest rates are low and many areas of the economy are still recovering while the stock market continues to new highs.
The product Q-Ray also violates the correlation does not mean causation concept. In order to find high correlation between two occurrences, a proper experiment should be executed. A proper experiment would include an experimental group who wore the bracelets, and a control group who were not given the bracelet. The company, however, makes claims that cannot be verified. The consumer should never trust a company that eludes to correlation meaning
Over the previous five years, the return of the ProIndex fund have outperformed the S&P 500 index, as the 5-year-return is nearly 3 times than the benchmark and the annualised return is nearly 2 times than the benchmark. It means ProIndex fund has a significant increase in value within that period. However, the ProIndex Fund has a higher standard deviation which means it is more risk than the S&P 500 index. Especially for the annualised standard deviation, it is approximately 10% higher than the benchmark. The correlation coefficient between the ProIndex and benchmark is about 0.65 which means both two variables are positive changing consistently, but there are still some other factors which have impacts on the relationship between two variables as the correlation is less than 1. Furthermore, the higher beta, 1.0132, which is more than 1 and it may be one of the reasons for high risk as well since it is more sensitive to the market change. It means that the ProIndex fund would increase by 1.0132% if the market increased by 1%.
In this paper the simple correlations will be discussed and how it results in a fictional
[16]. A Discussion with Burto Malkiel and Sendhil Mullainathan, 2005. Market Efficient versus Behavioural Finance, Journal of Applied Corporate Finance, Vol. 17, No. 3, A Morgan Stanley Publication, Summer 2005
In theory, market capitalisation weighted indices are preferred as compared to equally weighted indices due to the fact that they are superior proxies and are consistent with the true market portfolio. Some practitioners argue that there is a perceived segmentation between the Resources, Financial and Industrial sectors on the JSE and consequently prefer to use the Financial and Industrial Index as an overall market proxy for stocks belonging to this category. Choosing the correct market index in order to regress against, is a vital aspect. Stambaugh (1982) identifies that the CAPM tests are generally insensitive to the choice of market proxy. However, many believe that the broader the selected indices, the better the market proxies. In the UK market, the two main indices used are the FT 100 which is made up of the top 100 companies and the FT All Share Index which is made up of all companies traded on the exchange.
Capital Asset Pricing Model (CAPM) is an ex ante concept, which is built on the portfolio theory established by Markowitz (Bhatnagar and Ramlogan 2012). It enhances the understanding of elements of asset prices, specifically the linear relationship between risk and expected return (Perold 2004). The direct correlation between risk and return is well defined by the security market line (SML), where market risk of an asset is associated with the return and risk of the market along with the risk free rate to estimate expected return on an asset (Watson and Head 1998 cited in Laubscher 2002).
Another important concept outlined in this chapter is the correlation coefficient. The importance of this is being able to understand to what extent two things actually relate to each other. By having this awareness, we are better able to understand and function in the world we live in.
When two or more variables move in sympathy with the other, then they are said to be correlated. If both variables move in the same direction, then they are said to be positively correlated. If the variables move in opposite direction, then they are said to be negatively correlated. If they move haphazardly, then there is no correlation between them. Correlation analysis deals with the following:
Chapter 11 closes our discussion with several insights into the efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold against empirical evidence. Any pattern that is noticed by investors will disappear as investors try to exploit it and the valuation methods of growth rate are far too difficult to predict. As we said before the random walk concludes that no patterns exist in the market, pricing is accurate and all information available is already incorporated into the stock price. Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.
The efficient market hypothesis has been one of the main topics of academic finance research. The efficient market hypotheses also know as the joint hypothesis problem, asserts that financial markets lack solid hard information in making decisions. Efficient market hypothesis claims it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information . According to efficient market hypothesis stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments . In reality once cannot always achieve returns in excess of average market return on a risk-adjusted basis. They have been numerous arguments against the efficient market hypothesis. Some researches point out the fact financial theories are subjective, in other words they are ideas that try to explain how markets work and behave.
...son’s r correlation will be carried out, using two independent variables (I.V.). The I.V’s were (1) cognitive state anxiety (intensity), (2) somatic state anxiety (intensity). The dependant variable (D.V.) was the performance. The reason for doing this test is that a Correlation test is used for investigating the relationship between two variables. Pearson's r correlation is a measure of the strength of the association between the two variables.
This paper will define and discuss five financial theories and how they impact business decisions made by financial managers. The theories will be the Modern Portfolio Theory, Tobin Separation Theorem, Equilibrium Theory, Arbitrage Pricing Theory (APT), and the Efficient Markets Hypothesis.
The Dow Theory suggests that all information (of the past, present or future) is factored into the prices of stocks and indexes. It includes all micro and macro economic factors ranging from inflation to earnings.