if the return of two stocks has a correlation of 1, what does this imply about t

Question

if the return of two stocks has a correlation of 1, what does this imply about the relative movements in the stock prices? A) if the price of one stock goes up, the other stock price aalways goes up as well B) the percentage change in the stocks prices are exactly oposite of eachother- for ever + in one stock, the other stock is - C) for each $ increase in the price of one stock, other stock increase by $ D) the return of the two stocks are unrelated if the return of two stocks has a correlation of 1, what does this imply about the relative movements in the stock prices? A) if the price of one stock goes up, the other stock price aalways goes up as well B) the percentage change in the stocks prices are exactly oposite of eachother- for ever + in one stock, the other stock is - C) for each $ increase in the price of one stock, other stock increase by $ D) the return of the two stocks are unrelated A) if the price of one stock goes up, the other stock price aalways goes up as well B) the percentage change in the stocks prices are exactly oposite of eachother- for ever + in one stock, the other stock is - C) for each $ increase in the price of one stock, other stock increase by $ D) the return of the two stocks are unrelated

Explanation / Answer

The answer is option A. IF the price of one stock goes up, the other stock price always goes up as well.

Correlation is a tool that is used to measure the extent to which two or more variables fluctuate together. Hence in the given scenarion when the both the stocks when returned have a correlation value of 1, it means that they are proportionate to each other. Hence an increase in the price of one stock will automatically instill a price increase in the other stock.

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