Correlation coefficient measures the movement of two stocks i.e. whether they move in the same directions or opposite directions. It ranges from -1 to 1 (Russell, 2014) The above stocks have a negative correlation at -0.02 which means that when the price of one stock rises, the price of other stock will fall but the correlation is very weak and hence it can be said that the stocks are not much related.
The portfolio standard deviation is quite low at 1.57% as compared to individual deviations. This is because negatively correlated stocks diversify the portfolio. If returns from one stock decreases, the returns from another will increase, thus not affecting the returns much. Lower the portfolio standard deviation, lower is the risk.
Beta is the risk of the stock in relation to the market. Beta more than 1 means the stock is more responsive to the market risk. Retract Ltd. is more volatile as it has a higher beta of 1.76 which means that stocks of Retract are 76% more volatile than the market. Beta is a systematic risk and cannot be eliminated; hence, an investor should try to minimize his risk by diversifying his portfolio.
In the above scenario, both stocks have a beta of more than 1, even though they are negatively correlated but the degree of correlation is very weak, hence, this will not help in diversifying the portfolio because a fall in the market returns will result in both stock returns falling with a higher percentage.
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