Question

Investment reports often include correlations. Following a table of correlations among mutual funds , a reports add," Two funds can have perfect correlation, yet differnet levels of risk. For example, Funda A and Fund B may be perfectly correlated, yet fund A moves 20% whenever fund B MOVES 10%. Write a brief explanation for someone who knows no statistics,of how this happen. Includ a sketch to illustrate your explanation.

Answer 1

Can't sketch, but it would be a diagonal line going from lower left to upper right. A perfect positive correlation (r = +1) indicates that both increase/decrease together and you can predict one exactly from the other.