The term Corr (ε R,ε T) = 0 tells us that:
A) all error terms of company R and T are 0.
B) the unsystematic risk of companies R and T is unrelated or uncorrelated.
C) the correlation between the returns of companies R and T is -1.
D) the systematic risk of companies R and T is unrelated.
E) None of these.

Question

Quizplus · Accepted Answer

Corr (ε R,ε T) = 0 means that the unsystematic risk of companies R and T is unrelated or uncorrelated. It does not imply that all error terms are 0 or that the correlation between the returns is -1. It also does not refer to systemic risk.

The Term Corr (ε R,ε T) = 0 Tells Us