Using the following guidelines, choose the stocks—A, B, and C—of three firms that have been public for at least 10 years. Stock A should be one you are interested in buying. Stock B should be a stock, possibly in the same line of business or industry, that you feel will have the highest possible return correlation with stock A. Stock C should be one you feel will have the lowest possible return correlation with stock A.
a. Calculate the annual rates of return for each of the past 10 years for each stock.
b. Plot the 10 annual return values for each stock on the same set of axes, where the x-axis is the year and the y-axis is the annual return in percentage terms.
c. Join the points for the returns for each stock on the graph. Evaluate and describe the returns of stocks A and B in the graph. Do they exhibit the expected positive correlation? Why or why not?
d. Evaluate and describe the relationship between the returns of stocks A and C in the graph. Do they exhibit negative correlation? Why or why not?
e. Compare and contrast your findings in parts c and d with the expected relationships among stocks A, B, and C. Discuss your findings.