We define P as Return of Portfoilio ,M as Return of Market ,B as return of Benchmark .If the benchmark is an appropriate benchmark for the pportfolio which of the following is correct?
A. Correlation(P-B,B-M)<0
B.Correlation(P-M,B-M)=0
C.Correlation(P-M,B-M)>0
Anybody care to join in abd do explain yourself.
B is correct and C is correct
correlation between A= P-B and S=B-M should be = 0. It implies that active decisions should be uncorrelated with style.
The difference between the account and the market index i.e. E = (P - M) and manager’s style (S) should be highly positively correlated. It implies that when manager’s style outperforms (underperforms) relative to the market, we expect both the benchmark and the account to outperform (underperform) the market.