The Major Difference Between the Correlation Coefficient and the Covariance

question 28

Multiple Choice

The major difference between the correlation coefficient and the covariance is that:

• A)the correlation coefficient can be positive,negative or zero while the covariance is always positive
• B)the correlation coefficient measures relationship between securities and the covariance measures relationships between a security and the market
• C)the correlation coefficient is a relative measure showing association between security returns and the covariance is an absolute measure showing association between security returns
• D)the correlation coefficient is a geometric measure and the covariance is a statistical measure

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Definitions:

Shareholders

Individuals or entities that own shares in a corporation, giving them a claim on part of the company's assets and earnings.

Dividend Practices

Refers to corporate policies and strategies regarding the distribution of profits to shareholders in the form of dividends.

Earnings in Dividends

This term is not standard; likely refers to the portion of a company's earnings distributed to shareholders in the form of dividends.

Residual Dividend Policy

A strategy whereby companies pay dividends from the residual or leftover equity only after all project capital needs are met.