The momentum strategy exploits: a. positive serial correlation of returns at the portfolio level b. positive serial correlation of returns at the stock level c. negative serial correlation of returns at the portfolio level d. negative serial correlation of returns at the stock level

The momentum strategy is a strategy that aims to capitalize on the continuance of existing trends in the market. The idea is that stocks which have performed well in the past will continue to perform well, while those that have performed poorly will continue to perform poorly.

Let's analyze each option:

a. Positive serial correlation of returns at the portfolio level. This would mean that the overall returns of the portfolio are dependent on the returns of the previous period. While this could potentially be a factor in a momentum strategy, it is not the primary focus.

b. Positive serial correlation of returns at the stock level. This is the correct answer. In a momentum strategy, investors look for stocks that have shown a trend of either increasing or decreasing returns. The positive serial correlation means that if a stock's returns were high (or low) in one period, they are likely to be high (or low) in the next period as well.

c. Negative serial correlation of returns at the portfolio level. This would mean that the overall returns of the portfolio are inversely related to the returns of the previous period. This is not consistent with a momentum strategy.

d. Negative serial correlation of returns at the stock level. This would mean that if a stock's returns were high in one period, they are likely to be low in the next period, and vice versa. This is also not consistent with a momentum strategy.

So, the answer is (b) positive serial correlation of returns at the stock level.