Extra-Activity 3

For this analysis, I have used Dataset2 from the provided sheet, focusing on three numerical variables: the Current Ratio, P/E, and Earnings Yield of corporate bonds. Here, X1 represents the Current Ratio, X2 represents the P/E Ratio, and X3 represents the Earnings Yield.

Explanation of the Variables:

1. Current Ratio: This shows if a company has enough short-term assets to pay its short-term debts. A higher ratio means better short-term financial health.

2. P/E (Price-to-Earnings) Ratio: This compares a company's stock price to its earnings. It helps investors see if the company’s stock might be over- or undervalued.

3. Earnings Yield: This shows the return investors earn on each dollar invested in the company. A higher yield means better returns relative to the stock price.

Insights between X1 and X2: A positive correlation between the Current Ratio and P/E Ratio suggests that companies with greater liquidity (higher Current Ratio) tend to have higher market valuations (higher P/E). This connection indicates that strong liquidity signals financial stability, growth potential, and enhanced investor confidence, resulting in a greater willingness to pay for their shares.

The covariance between the Current Ratio and P/E Ratio is 0.3432, indicating a positive relationship; as the Current Ratio increases, the P/E Ratio tends to rise as well. In contrast, the covariance between the P/E Ratio and Earnings Yield is -0.5564, suggesting a negative relationship; as the P/E Ratio increases, the Earnings Yield tends to decrease. Additionally, the covariance between the Current Ratio and Earnings Yield is -1.1885, indicating a stronger negative relationship; as the Current Ratio increases, the Earnings Yield tends to decline. Together, these covariances illustrate that while liquidity (Current Ratio) is positively linked to market valuation (P/E Ratio), it is negatively associated with the returns generated (Earnings Yield).