Financial Risk Manager Part 1
Get started today
Ultimate access to all questions.
Deep dive into the quiz with AI chat providers.
We prepare a focused prompt with your quiz and certificate details so each AI can offer a more tailored, in-depth explanation.
Which of the following statements is NOT true regarding the correlation coefficient?
Other
Community
NNikitesh
A
The correlation coefficient measures the strength of the linear relationship between two random variables
B
The correlation coefficient has no units
C
The correlation coefficient ranges from 0 to +1
D
Random variables with a correlation of +1 are said to be perfectly correlated
Explanation:
The correct answer is C because the correlation coefficient actually ranges from -1 to +1, not from 0 to +1.
Explanation:
-
Option A is true: The correlation coefficient (typically Pearson's correlation coefficient) measures the strength and direction of the linear relationship between two random variables.
-
Option B is true: The correlation coefficient is a dimensionless quantity with no units, as it's calculated by standardizing the covariance by the product of the standard deviations of the two variables.
-
Option C is NOT true: The correlation coefficient ranges from -1 to +1, not from 0 to +1. A value of -1 indicates perfect negative correlation, 0 indicates no linear correlation, and +1 indicates perfect positive correlation.
-
Option D is true: Random variables with a correlation of +1 are indeed said to be perfectly correlated, meaning they move in exactly the same direction in a perfectly linear relationship.
In finance, the correlation coefficient is crucial for portfolio diversification, risk management, and understanding how different assets move relative to each other. The fact that it ranges from -1 to +1 allows investors to identify assets that might provide diversification benefits (negative correlation) versus those that move together (positive correlation).
Comments
Loading comments...