R27 : EOC Q12 statements, solution, correct, periods, market

Howd

Shall the Attribute 2 stated is wrong ? The solution indicated that it is correct.

The statements in 2nd paragraph on P.376 of CFAI text Vol 3 said :
...... In other words, the apparent obsevation that correlation increases in periods of market turbulance is simply an obsevation that market volatility has increased, but the "TRUE CORRELATION REMAINS CONSTANT".

Valores

Attribute 2 is not wrong over a shorter time horizon . True correlation is measured over longer periods and indicates relatively stable correlations. Any temporary spikes in correlation due to turbulence/volatility is simply a statistical property of correlations and is inconsequential to long run returns. Collier's argument is that correlations do increase temporarily due to volatility in turbulent times , but CFAI says you can't take that to the bank and claim increased returns

Iginla2011

janakisri,

Thank you for your response !
Your explanations are resonable. However, it is not stated in text that there is relevance of volatility in short-term and long-term.

My understanding is that even markets become more volatile during turbulence, in fact, the TRUE correlation has not changed.

Any further comment ?

liangfeng

AMA Wrote:
-------------------------------------------------------
> janakisri,
>
> Thank you for your response !
> Your explanations are resonable. However, it is
> not stated in text that there is relevance of
> volatility in short-term and long-term.
>
> My understanding is that even markets become more
> volatile during turbulence, in fact, the TRUE
> correlation has not changed.
>
> Any further comment ?

That's just one side of the argument. There are studies that justify the opposite. There is no real clear answer.

NO EXCUSES