What is the key principle behind identifying pair trading opportunities based on the ratio? Option: "The ratio is expected to follow a predetermined trend, allowing traders to anticipate future price movements.", "The ratio is expected to remain constant over time, providing predictable trading opportunities.", "The ratio is expected to fluctuate randomly, creating opportunities for arbitrage.", "The ratio is expected to revert to its mean value after deviating from it, offering potential buy or sell signals."

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What is the key principle behind identifying pair trading opportunities based on the ratio?

"The ratio is expected to follow a predetermined trend, allowing traders to anticipate future price movements."

"The ratio is expected to remain constant over time, providing predictable trading opportunities."

"The ratio is expected to fluctuate randomly, creating opportunities for arbitrage."

"The ratio is expected to revert to its mean value after deviating from it, offering potential buy or sell signals."

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Why does the author prefer using the ratio as the variable for pair trading?

"The ratio is simpler to calculate and interpret compared to the spread or differential."

"The ratio reflects the market valuation of the stocks and provides insights into their relative price movements."

"The ratio is a more widely accepted metric in the financial industry, leading to greater transparency."

"The ratio is less volatile than the spread or differential, making it easier to manage risk."

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What is the key factor in pair trading?

Market volatility

Correlation between two stocks

Dividend payout ratio

Company's market capitalization

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What is the core concept behind pair trading?

"Identifying companies with identical stock prices"

"Predicting future stock market trends"

"Exploiting price discrepancies between related assets"

"Investing in companies with high growth potential"

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What is the 'Error Ratio' used for in pair trading?

To calculate the expected return from a pair trade

To predict the future price of a stock

To determine the correlation between two stocks

To decide which stock should be the independent variable and which should be the dependent variable

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How does the concept of standard deviation relate to pair trading based on the ratio?

"Standard deviation measures the average value of the ratio, providing a baseline for comparison."

"Standard deviation quantifies the volatility of the ratio, indicating the likelihood of it reverting to the mean."

"Standard deviation determines the optimal time frame for holding a pair trade, maximizing profitability."

"Standard deviation identifies the correlation between the two stocks in the pair, highlighting their interconnectedness."