An analyst has made the following return projections for each of three possible outcomes with an equal likelihood of occurrence:
Asset | Outcome 1 (%) |
Outcome 2 (%) |
Outcome 3 (%) |
Expected Return (%) |
1 | 12 | 0 | 6 | 6 |
2 | 12 | 6 | 0 | 6 |
3 | 0 | 6 | 12 | 6 |
Question
Q. Which pair of assets is perfectly negatively correlated?
- Asset 1 and Asset 2.
- Asset 1 and Asset 3.
- Asset 2 and Asset 3.
option 3
As you can see a certain one and two are positively correlated i.e when the return is 12 for asset 1 it also same for asset 2.
As in outcome 2 we can see that the return has decreased of asset 1 to 0 and also the return of asset 2 has decreased to 6.
This shows positive correlation.
Where an asset 2 and 3 there are negatively correlated.
As you can see an outcome one the return of asset 2 is 12 but the return of asset 3 is 0.
But In outcome 2 you can see the return of asset 2 has decreased to 6 but the return of asset has increased to 6.
An outcome tree the return of asset to has decreased to 0 but the return on asset 3 has increased to 12 this shows negative correlation between the pair of asset 2 and 3.H
Hope this helps you!