Given the returns on a domestic stock and a foreign stock, what are the correlation coefficients relating the returns for the 15 years and for each five-year time period: 1989€“1993, 1994€“1998, and 1999€“2003? What do the coefficients imply about diversification for the entire period and the five-year subperiods? Did the potential for diversification change during the 15 years? (This problem illustrates how correlation coefficients are computed and their importance to investments. Either perform the calculations manually as illustrated in the appendix to this chapter, or use the Investment Analysis Calculator. The correlation coefficient (R) is in the section on simple regression. Arbitrarily assume that one of the returns is the independent variable and the other is the dependent variable. You may also calculate the correlation coefficients using a spreadsheet such as Excel. To calculate the correlation coefficients, go to the section €œData Analysis€ under€œTools.€)

Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Domestic Stock 31.5% 3.2 30.6 7.7 10.0 1.3 37.4 23.1 33.4 28.5 21.0 9.0 Foreign Stock 10.6% 12.8 33.1 8.0 11.5 6.3 2.0 20.3 27.2 -13.9 -21.2 -15.6 39.1 22.0 28.6