Correlation Coefficient Interpretation for Two Assets

Consider a portfolio consisting of two assets, Asset X and Asset Y. The returns of these assets over five time periods are given below:

Asset X: 5%, 7%, 10%, 4%, 6%

Asset Y: 3%, 8%, 9%, 5%, 7%

Using the sample data, calculate the correlation coefficient between the returns of Asset X and Asset Y. The correlation coefficient is a measure of the linear relationship between two variables and is computed using the following formula:

$$ r_{XY} =\frac{Cov(X,Y)}{ au_X au_Y} $$

Where:

• $$ Cov(X,Y) $$ is the covariance between the returns of Asset X and Asset Y.
• $$ au_X $$ is the standard deviation of Asset X returns.
• $$ au_Y $$ is the standard deviation of Asset Y returns.

After performing necessary calculations, what is the interpretation of the resulting correlation coefficient?