Question

XYZ Bank computes the exponentially weighted return volatility for its investment portfolio using 390 historic observations and = .996. What weight would be given to the 2'th last return observation? Note: Your answer must be accurate to within five decimal places.

Answer 1

Under Exponentially weighted return volatility, data of nth day have a weight of (λ^n)*(1-λ)

So 2nd last return observation from 390 historic data is 389th observation

So, n=389

weight = (0.996^389)*(1-0.996) = 0.00084