Part B Calculate the correlation coefficient between TREAS_You and INFL_you. Exp
ID: 1152784 • Letter: P
Question
Part B Calculate the correlation coefficient between TREAS_You and INFL_you. Explain your calculations. Again this can be done using a "formula command in EXCEL" but I would prefer it be done using the data analysis tool pack. The formula for correlation looks like this -CORREL(D14:D33,E14:E33) where the range of the variables (data) is d14:d33 and e14:e33 if you want to use the actual inflation rate and the actual Treasury 5 year rate. The correlation for the actual values is -0.094844307 which is a negative but not terribly strong correlation. Part C. Provide an intuitive explanation for what the correlation coefficient means that you calculated in part B.Explanation / Answer
The correlation of -0.0948 has been calculated in Part B.
We notice that the correlation is not very strong between inflation and 5 year treasury rates. The reason why correlation is not very strong is because inflation data is recorded at monthly level while Treasury rates are for 5-year securities. The 5-year Treasury rates won't reflect the monthly inflationary expectations and hence the correlation will be weak.