The annual returns of two assets, X(i) and Y(i), are shown below for the five years from 2010 to 2013. The returns have been sorted with respect to X(i); for example, in 2010 X(i) returned 1.0% which ranked 3rd among its annual returns and in the same year Y(i) returned -3.3% which ranked 1st among its annual returns (ranking is from worst to best). The final two columns compute the number of concordant pairs, which is six, and the number of discordant pairs, which is four.
The Pearson correlation coefficient, taken from the actual return pairs – for example, (X, Y) = (-8.8%, 0.8%) – is 0.5490. But we are interested instead in a rank correlation. Which is nearest to the Kendall’s tau?
A-0.15
B0.20
C0.50
D0.67
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