What is the primary function of the density curve in pair trading?

To calculate the ratio between two stocks To determine the average price of a stock To identify trading opportunities based on stock price deviations To predict future stock market trends

According to the text, what is the ideal scenario for a long pair trade?

Initiating the trade near the 2nd standard deviation and closing it as it approaches the mean Initiating the trade near the 3rd standard deviation and closing it as it approaches the mean Initiating the trade at the mean and closing it as it approaches the 2nd standard deviation Initiating the trade at the mean and closing it as it approaches the 3rd standard deviation

In the context of pair trading, what does 'Rupee Neutrality' refer to?

Maintaining equal investment amounts in both stocks of the pair Ensuring that both stocks in the pair have the same lot size Balancing the total Rupee value of long and short positions in a pair trade Calculating the ratio of two stocks based on their Rupee value

What is a key characteristic of pair trading that requires careful consideration?

It requires frequent trading and quick decision-making It involves high transaction costs due to frequent trades It demands significant margin money due to simultaneous long and short positions It relies heavily on technical analysis and chart patterns

What is a limitation of the pair trading technique discussed in the text?

It is only applicable to stocks in the same sector It generates a limited number of trading signals per year It requires advanced mathematical skills to implement It is highly susceptible to market volatility