Question1.2 In an efficient market the correlation coefficient between stock returns for two nonoverlapping time periods should be:Select one alternative: negative and small. zero positive and large. negative and large. positive and small. ResetMaximum marks: 2.5 Flag question undefined单项选择题
A
negative and small.
B
zero
C
positive and large.
D
negative and large.
E
positive and small.

Question

Question1.2 In an efficient market the correlation coefficient between stock returns for two nonoverlapping time periods should be:Select one alternative: negative and small. zero positive and large. negative and large. positive and small. ResetMaximum marks: 2.5 Flag question undefined单项选择题

A

negative and small.

B

zero

C

positive and large.

D

negative and large.

E

positive and small.

BlackTom AI · Accepted Answer

Let’s break down what the question is asking about correlation in an efficient market over nonoverlapping time periods.
Option 1: 'negative and small.' In an efficient market, returns over successive nonoverlapping periods are expected to be uncorrelated, so we would not expect a systematic negative correlation of any size. This option is therefore unlikely.
Option 2: 'zero.' If price changes are random and information is instantly incorporated, returns in nonoverlapping periods should be uncorrelated, leading to a correlation near zero. This aligns with the concept of market efficiency and random-walk-like behavior of prices.
Option 3: 'positive and large.' A large positive correlation would imply a predictable link between consecutive periods, contradicting the idea of independence in an efficient market. This would suggest a form of predictability that EMH argues against.
Option 4: 'negative and large.' A strong negative correlation would indicate a systematic reversal from one period to the next, which is not expected under strong EMH assumptions for nonoverlapping intervals.
Option 5: 'positive and small.' A small positive correlation would still imply some predictability, which is not consistent with the typical EMH view of independence between nonoverlapping returns, though in practice estimates might be slightly biased away from zero. Overall, this option does not capture the ideal expectation of independence.
In summary, the core idea is that, in an efficient market, price changes (and thus returns) from one nonoverlapping period should not predictably relate to the next period. This leads to the conclusion that the correlation should be zero, rather than any nonzero value.

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