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Two shares, ABC and ACB, generally have a very high correlation. In addition, when one performs poorly, relative to the other, it generally corrects. An
Two shares, ABC and ACB, generally have a very high correlation. In addition, when one performs poorly, relative to the other, it generally corrects. An investor notices that ABC has been trading strongly, with a current price of $8.50 . ACB has been trading weakly over the last month, with a current price of $7.40. He believes the two shares should over time converge to the same price. What trade should this pairs trader put on? Outline and explain the risks that our trader faces?
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