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 and then again in 2008. Hence, Sensex fluctuation does not determine the Gold prices i.e. rise in Sensex might not always lead to rise in gold price.
Analyst 2: Through the recovery phase that commenced in 2003, gold prices kept rising.
Analyst 1: Gold prices normally appreciates in value.
Analyst2: Fluctuations in Gold prices are determined by the fluctuations in Sensex i.e.: Decline In sensex.
This created a confusion. Hence, to clarify the confusion he plans to study the price trends of the Gold rates and the Sensex for the dates ranging from June 1st2012 August 31st2012.
After checking the correlation he found that the correlation between the closing prices on Gold and Sensex was 0.24 which was weak. Thus, he decided that Sensex rates was not the only factor to consider investment in Gold. Otherwise, Gold is a good option for investment as it provides diversification and hedging in investment.
Correlation between Gold and Sensex is 0.24 which is positive and weak. Thus, based on this correlation change in Sensex has an effect on Gold rate but it is very small.