Refer to Table 1-2 given in Problem 1.6. Compute the covariances between the S&P
ID: 3021801 • Letter: R
Question
Refer to Table 1-2 given in Problem 1.6. Compute the covariances between the S&P; 500 index and the CPI and between the three-month Treasury bill rate and the CPI. Are these population or sample covariances? Compute the correlation coefficients between the S&P; 500 index and the CPI and between the three month Treasury bill rate and the CPI. A priori, would you expect these correlation coefficient to be positive or negative? Why? If there is a positive relationship between the CPI and the three month Treasury bill rate, does that mean inflation, as measured by the CPI, is the cause of higher T bill rates?Explanation / Answer
a. The covariance between the S&P 500 index and the CPI is 15.137.111
The covariance between the CPI and the three Month Treasury bill rate is -88.171
These are population Covariance values since given data is population data
b. Generally, CP and S&P stock index data show an upward trend, whereas the three-meonth treasury bill rate is downward trend.
The correlation between the S&P 500 index and the CPI is 0.93
The correlation between the CPI and the three Month Treasury bill rate is -0.8122
c.Here The relation between the S&P 500 index and the CPI is positive correlation and
the relationship between the CPI and the three-month Treasury bill rate is negative correlation,
Yes, mean inflation, as measured by the CPI, the cause of higher T bill rates