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Problem $6-03$

The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six$-$month period.

Month Madison Cookies Sophie Electric

$1-0\mathrm{.}030\mathrm{.}07$

$20\mathrm{.}05-0\mathrm{.}02$

$3-0\mathrm{.}06-0\mathrm{.}09$

$40\mathrm{.}110\mathrm{.}16$

$5-0\mathrm{.}03-0\mathrm{.}08$

$60\mathrm{.}070\mathrm{.}02$

Compute the following. Do not round intermediate calculations. Round your answers to four decimal places.

Average monthly rate of return, Ri $,$ for each stock

Madison Cookies:

Sophie Electric:

Standard deviation of returns for each stock

Madison Cookies:

Sophie Electric:

Covariance between the rates of return

Covij :

The correlation coefficient between the rates of return

rij :

Would these two stocks be good choices for diversification? Why or why not?

Madison Cookies and Sophie Electric are

$-$Select$-$

choices for diversification as these assets have

$-$Select$-$

correlation.