Correlation of Stocks and Bonds

Investors are often interested in the correlation between the returns of two different assets for asset allocation and hedging purposes. In this exercise, you'll try to answer the question of whether stocks are positively or negatively correlated with bonds. Scatter plots are also useful for visualizing the correlation between the two variables.

Keep in mind that you should compute the correlations on the percentage changes rather than the levels.

Stock prices and 10-year bond yields are combined in a DataFrame called stocks_and_bonds under columns SP500 and US10Y

The pandas and plotting modules have already been imported for you. For the remainder of the course, pandas is imported as pd and matplotlib.pyplot is imported as plt.

This exercise is part of the course

Time Series Analysis in Python

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Exercise instructions

Compute percent changes on the stocks_and_bonds DataFrame using the .pct_change() method and call the new DataFrame returns.
Compute the correlation of the columns SP500 and US10Y in the returns DataFrame using the .corr() method for Series which has the syntax series1.corr(series2).
Show a scatter plot of the percentage change in stock and bond yields.

Hands-on interactive exercise

Have a go at this exercise by completing this sample code.

# Compute percent change using pct_change()
returns = stocks_and_bonds.___

# Compute correlation using corr()
correlation = ___
print("Correlation of stocks and interest rates: ", correlation)

# Make scatter plot
plt.___
plt.show()

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