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”.
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
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 ?
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.
So, Attribute 2 is wrong ? And the solution is not correct ?