medium · FRM Part 2 Risk & Investment Management
When a real estate index shows an autocorrelation of φ = 0.60, and the reported correlation with the S&P 500 is 0.25, the true economic correlation is most likely:
- Materially higher than 0.25 after adjusting for lags.
- Exactly 0.25 as autocorrelation only affects volatility, not correlation.
- Negative, providing a powerful hedge during market crashes.
- Lower than 0.25 because real estate is an idiosyncratic asset class.
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