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Correlation Coefficient (S&P 500 and Stock Index)

What is the most likely correlation coefficient between a stock index mutual fund and the S&P 500?

a 1.0
b. 0.0
c. 1.0
d. none of the above

Please explain your answer and reasoning, so that I might understand how and where you concluded your answer.

Solution This solution is FREE courtesy of BrainMass!

Beta (the correlation coefficient) measures a mutual fund's volatility relative to the benchmark, in this case the S&P 500 index. The Beta is calculated on the basis of a monthly return over the past three years. A mutual fund that is in perfect sync with the market has a beta of 1.0 (1 to 1 relation). More conservative investments will have coefficients less than 1.0. In this case, the most likely correlation between a stock index mutual fund and the S&P 500 is 1.0 unless it is a very conservative fund such as a utility fund. In your answer, two of the answers are 1.0 so it will be a or c.