CONNECT WITH LEARNSMART FOR BODIE: ESSE
CONNECT WITH LEARNSMART FOR BODIE: ESSE
11th Edition
ISBN: 2819440196239
Author: Bodie
Publisher: MCG
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Chapter 8, Problem 1PS
Summary Introduction

Adequate Information:

Markets are efficient.

To construct:

What should be the correlation coefficient between stock returns for two no overlapping time periods.

Introduction:Correlation Coefficientis a measure of strength of relationship between the relative movements of two variables.

Expert Solution & Answer
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Answer to Problem 1PS

Hence, the correlation coefficient for two non-overlapping periods shall be zero.

Explanation of Solution

In efficient markets, prices of securities quickly adjust to any new information that arrives in the market thereby reflecting all the available information in market in current security prices.

If markets are efficient, then stock prices would always reflect any market information in their price movements at any point of time. The correlation coefficient for two non-overlapping periods shall be zero. Else, one may leverage returns from one period to forecast returns in other time periods thereby making subnormal profits.

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