How does autocorrelation affect investment returns?

Autocorrelation refers to the correlation of a signal with a delayed copy of itself, often applied in finance to analyze patterns in investment returns over time. When discussing investment returns, if we observe that past returns exhibit similar patterns or are correlated with future returns, this suggests there is some level of predictability based on historical performance.

In this context, option C highlights that autocorrelation indicates how past performance might influence future performance. If returns are positively autocorrelated, this means that high returns in the past are likely to be followed by high returns in the future, or vice versa for low returns. This characteristic can be leveraged by investors to anticipate future movements based on historical return patterns, thereby potentially improving their investment strategies and returns.

Understanding this concept is crucial for risk managers and investors alike, as recognizing patterns in returns can contribute to making informed decisions about asset allocation and timing in the markets.