Just a random reminder to myself for a simple mathematical understanding.
When using the correlation between the stocks and the indices, why use the return correlation instead of the price correlation?
The explanation is simple,
Suppose you own three stocks.
Stock A closed at 5 dollars a share yesterday and at 6 dollars a share today.
Stock B also closed at 5 yesterday and at 4 today. But it was also an ex-date for a $1 dividend.
Stock C closed at 100 yesterday and at 101 today.
As an investor, do you care about the price change ($1 in each case) or the return?
Conclusion is simple, because we want maximum returns for minimum risk
No comments:
Post a Comment