Give an Example of Two Factors That Are Positively Correlated

question 29

Essay

Give an example of two factors that are positively correlated, and explain what that means.

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Definitions:

Correlation Coefficient

A statistical measure that describes the extent to which two variables fluctuate together, ranging from -1 (perfect negative correlation) to +1 (perfect positive correlation).

Covariance

A measure of the degree to which two variables move in relation to each other, indicating the direction of their relationship.

Expected Return

The anticipated return on an investment, averaging in the probability of different outcomes.

Optimal Risky Portfolio

A portfolio construction that maximizes expected return for a given level of risk, based on modern portfolio theory.