Question

if you invest in two stocks, and their values both rise on one day and then fall on the next day, they have ________.

○ a positive beta value

○ a negative beta value

○ a zero covariance

○ a large covariance

Explanation:

To solve this, we analyze the relationship between the two stocks' price movements. When two stocks move in the same direction (both rise, then both fall), their returns have a positive relationship. Covariance measures how two variables (stock returns) move together. If they move in the same direction, covariance is positive (and likely large in magnitude if the movements are significant). Beta relates a stock's return to the market, but here we focus on the two stocks' relationship. Zero covariance would mean no relationship, negative would mean opposite movements. Since they move together, they have a large (positive) covariance.

Answer:

a large covariance