Correlation and Regression Analysis : Comparison between Gold rates and Sensex
Correlation : Correlation is a statistical technique that can show whether and how strongly pairs of variables are related. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random.
Regression analysis: It involves identifying the relationship between a dependent variable and one or more independent variables.
The initial analysis compares two Asset index prices the SENSEX and the GOLD. The Sensex has the top 30 stocks. The Gold is an important Asset in terms on Investment as it also offers the benefit on diversifying the Portfolio risk.
To apply the Correlation and regression concept, we consider an investor who plans to invest in Gold looking at the rise in the gold prices. He is still reluctant if he should choose Gold as an investment option or if he should consider investing in some other investment options based on Sensex. as on 15th September 2012.
Hence, he plans to carry out a research on the same, for which he attends a seminar on “Investment Opportunities”. There was a debate amongst the Financial Analysts - “Does Sensex rates affect Gold prices?”
Analyst1 : Gold prices have been on an uptick since 2000, while the stock market declined from 2000 to 2003...
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