# 2 questions from CFAI 5

Can some one explain how you get the answers? 1. 3 economic variables. increase A 1 unit, Variable B increase by 05 units. Variable C decrease by 0.5 Unit. what is Correlation between A&B, A&C Answer is A&B=1, A&C=-1. but i think i should be 0.5 and -0.5 respectively. 2. Apollo TV inc data for 2006 common stock (\$2 par value, authorized: 3 Million shares; issued 2 million share): \$4,000,000. Additional paid-in capital: \$12,000,000 Retained earing: \$5,000,000 Treasury Stock(cost of 200,000 shares repurchased in 2004): 3,000,000 current stock price per share: 20 Price to book value ratio is closed to: A: 1.8x B: 1.9x C: 2.0x D: 2.2X Answer is C.

Problem 1: Correlation is the direction of movement only. It says when A increases - B increases as well. Just because A moved 1 unit and B moved 0.5 units - does not mean Correlation is 0.5. It is +1 because both are moving in the same direction. Between A and C when A moved up, C moved down. So Correlation is -1. Problem 2: BV = 4 + 12 +5 - 3 = 18M\$ # of Shares = 2 - 0.2 = 1.8M (Treasury Stock repurchased). So BVPS = 10 Price = 20 So P/BV = 20/10 = 2x Choice C

For 1 – http://www.analystforum.com/phorums/read.php?11,637126,637509#msg-637509 2. Total BV = 4+12+5-3=18m Total shares = 2-.02 (repurchased)=1.8 18/1.8=10 P/BV=20/10=2.0X

Regarding correlation, it isn’t just that they moved in the same direction, it’s that the strength of their relationship is linear…If A moves a certain amount, B moves a certain amount (doesn’t have to be the same amount A moved). That’s why they are perfectly correlated. For every amount A moved, you know the amount B moved.

So since they have an identical slope the correlation is perfect?