1. Should stocks in the same industry have a higher or lower correlation than different industry...
1. Should stocks in the same industry have a higher or lower correlation than different industry stocks? Explain.
Homework Answers
1. Should stocks in the same industry have a higher or lower correlation than different industry stocks? Explain.
The stocks in the same industry are likely to have a higher correlation than different industry stocks.
Example: Consider two stocks in the Information Technology stocks. These stocks have a higher correlation than with any other industry stock, say Fast Moving Consumer Goods stocks.
This is because factors such as the exchange rate fluctuations, affect both the stocks in the Information Technology stocks more or less in the same way but have no effect on the Fast Moving Consumer Goods stocks.
So, the stocks in the same industry are likely to have a higher correlation than different industry stocks.
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