a. Compute the covariances between the S&P 500 index and the CPI and between the three-month Treasury bill rate and the CPI. Are these population or sample covariances?
b. Compute the correlation coefficients between the S&P 500 index and the CPI and between the three-month Treasury bill rate and the CPI. A priori, would you expect these correlation coefficients to be positive or negative? Why?
c. If there is a positive relationship between the CPI and the three-month Treasury bill rate, does that mean inflation, as measured by the CPI, is the cause of higher T bill rates?
For Information: Refer to Table 1-2 given in Problem 1.6.