# As a new analyst, you have calculated the following annual rates of return for both Lauren Corporation and Kayleigh Industries. Your manager suggests that because these companies produce similar products, you should continue your analysis by computing their covariance. You decide to go an extra step by calculating the coefficient of correlation using the data provided in Problem 1. Prepare a table showing your calculations and explain how to interpret the results. Would the combination of Lauren and Kayleigh be good for diversification? Explain how to interpret the results. Would the combination of Lauren and Kayleigh be good for diversification?

Problem: # 1. As a new analyst, you have calculated the following annual rates of return for both Lauren Corporation and Kayleigh Industries.

Year Lauren's Rate of Return Kayleigh's Rate of Return

1996 5 5

1997 12 15

1998 -11 5

1999 10 7

2000 12 -10

Your manager suggests that because these companies produce similar products, you should continue your analysis by computing their covariance. Show all calculations.

Problem: # 2. You decide to go an extra step by calculating the coefficient of correlation using the data provided in Problem 1. Prepare a table showing your calculations and explain how to interpret the results. Would the combination of Lauren and Kayleigh be good for diversification? Explain how to interpret the results. Would the combination of Lauren and Kayleigh be good for diversification?
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I need help to solve some problems from book Corporate Investment Analysis - in FINANCE. Book from: Reilly, F. & brown, K. (2009). Investment Analysis and Portfolio Management (9th ed.). Mason, OH: South-Western/ Cengage Learning. Book used by Strayer University. I need help to solve those Appendix problems: 1, and 2

#### Solution Preview

...X- Xmean)x (Y-Ymean)/(N-1)= -5.8 =-23.2/( 5-1)

Problem: # 2. You decide to go an extra step by calculating the coefficient of correlation using the data provided in Problem 1. Prepare a table showing your calculations and explain how to interpret the results. Would the combination of Lauren and Kayleigh be good for diversification?

To calculate the correlation coefficient, we need to find the standard deviations of returns

Standard deviation of Lauren's Rate of Return (X)

X= X ^2 =
5 25
12 144
-11 121
10 100
12 144

Total= 28 534
n=no of observations= 5

variance={&#931;X ^2 - (&#931;X) ^ 2 /n}/(n-1)= 94.3 =(534-28^2/5)/(5-1)
standard deviation =&#8730;Variance= 9.7108 =&#8730;94.3

Standard deviation of Kayleigh's Rate of Return (Y)

Y= Y ^2 ...