Answer: relative valuation model.

## Explanation **Option A** is correct because relative valuation models are ideal for pairs trading strategies. **Why relative valuation models work best for pairs trading:** - **Comparability:** Relative models compare companies within the same industry/sector - **Mean reversion:** Pairs trading relies on the assumption that valuation ratios will revert to historical norms - **Market-neutral:** The strategy aims to profit from relative mispricing regardless of overall market direction **Other models are less suitable:** - **Asset-based models:** Focus on liquidation value, not relative performance - **Free cash flow models:** Focus on absolute intrinsic value, not relative valuation differences Pairs trading typically uses metrics like P/E ratios, P/B ratios, or other multiples to identify temporarily mispriced pairs.

Author: LeetQuiz Editorial Team