Which of the following is NOT a variable used to measure the relationship between two stocks in pair trading? Option: Ratio, Differential, Volatility, Spread

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

Ratio

Differential

Volatility

Spread

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

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

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

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

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

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What is the key factor in pair trading?

Dividend payout ratio

Company's market capitalization

Correlation between two stocks

Market volatility

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

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

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

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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

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

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

To calculate the expected return from a pair trade

To determine the correlation between two stocks

To predict the future price of a stock