Morningstar tracks the performance of a large number of companies and publishes an evaluation of each. Along with a variety of financial data, Morningstar includes a Fair Value estimate for the price that should be paid for a share of the company’s common stock. Data for 30 companies are available in the file named FairValue. The data include the Fair Value estimate per share of common stock, the most recent price per share, and the earning per share for the company (Morningstar Stocks 500, 2008).
a. Develop a scatter diagram for the Fair Value and Share Price data with Share Price on the horizontal axis. What is the sample correlation coefficient and what can you say about the relationship between the variables?
b. Develop a scatter diagram for the Fair Value and Earnings per Share data with Earnings per Share on the horizontal axis. What is the sample correlation coefficient and what can you say about the relationship between the variables?