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	-0.03		0.05
2	0.05		-0.01
3	-0.07		-0.13
4	0.14		0.15
5	-0.02		-0.04
6	0.05		0.03

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

1. Average monthly rate of return R_i for each stock.

   Madison Cookies:

   Sophie Electric:

2. Standard deviation of returns for each stock.

   Madison Cookies:

   Sophie Electric:

3. Covariance between the rates of return.

4. The correlation coefficient between the rates of return.

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

   Madison Cookies and Sophie Electric are -Select-goodbadItem 7 choices for diversification as these assets have -Select-high positivehigh negativelow positivelow negativeItem 8 correlation.