What does 'spread' refer to in the context of pair trading?

The difference between the bid and ask price of a stock The difference between the prices of the same asset in different markets The difference between the closing prices of two stocks The average daily return of a stock

How is 'differential' calculated in pair trading?

Closing Price of Stock 1 divided by Closing Price of Stock 2 Closing Price of Stock 1 plus Closing Price of Stock 2 Closing Price of Stock 1 minus Closing Price of Stock 2 Average daily return of Stock 1 minus average daily return of Stock 2

What does a correlation of +0.85 between two stocks indicate?

The stocks will always move in the same direction with the same magnitude. The stocks are likely to move in opposite directions with similar magnitudes. The stocks are not related to each other in terms of price movement. The stocks are likely to move in the same direction, with a strong tendency to move together.

What is 'convergence' in pair trading?

When the ratio or spread between two stocks is expected to widen When the correlation between two stocks becomes negative When the price of one stock significantly outperforms the other When the ratio or spread between two stocks is expected to narrow

Which of the following is NOT a variable used to measure the relationship between two stocks in pair trading?

Spread Differential Volatility Ratio