Given the returns on a domestic stock and a foreign stock, what are the correlation coefficients relating the returns for the 20 years and for each five-year time period: 1997-2001, 2002-2006, 2007-2011, and 2012-2016? What do the coefficients imply about diversification for the entire period and the five-year sub-periods? Did the potential for diversification change during the 20 years? (This problem illustrates how correlation coefficients are computed and their importance to investments. You may perform the calculations manually as illustrated in the appendix to this chapter. You may also calculate the correlation coefficients using a spreadsheet such as Excel.)

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Domestic Stock 31.5% -3.2 30.6 7.7 10.0 1.3 374 23.1 33.4 28.5 21.0 -9.0 Foreign Stock 10.6% Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -23.0 12.8 -12.1 33.1 8.0 11.5 6.3 2.0 20.3 27.2 -13.9 -21.2 -15.6 39.1 20.7 14.0 26.9 11.6 -43.1 22.0 28.6 10.9 4.9 15.8 5.5 -31.9