Explanation:
A positive correlation of +1 means that returns move in the same direction in exactly the same proportions. In contrast, a perfect negative correlation of -1 suggests that the deviation in the returns of two assets is inversely proportionate.
A linear correlation greater than zero indicates a positive relationship. A value that is less than zero signifies a negative relationship. A zero correlation exists when there is no linear relationship between two variables, making option C the incorrect interpretation and therefore the right answer.
Q.69 Which of the following is most likely an INCORRECT interpretation of the correlation coefficient?
A
A correlation coefficient of +1 means that the mean returns of two assets move proportionately in the same direction.
B
A correlation coefficient of -1 means that the mean returns of two assets move proportionately in different directions.
C
A correlation coefficient of 0 means that the mean returns of two assets move disproportionately in different directions.
D
Any correlation greater than zero indicates a positive relationship.
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