Assume that stock market returns do not resemble a single-index structure. (a) Assume that stock market returns do not...
- Assume that stock market returns do not resemble a single-index structure. (a) Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 2,000 stocks in order to construct a mean-variance efficient portfolio constrained by 2,000 investments. They will need to calculate (N) ____ expected returns, (N)___________ variances of returns and ________ covariances.
- Assume that stock market returns do follow a single-index structure. An investment fund analyzes 2,000 stocks in order to construct a mean-variance efficient portfolio constrained by 2,000 investments. They will need to calculate (N)________ estimates of expected returns and (N)________ estimates of sensitivity coefficients to the market factor (betas).
Homework Answers
Ans 1):Assume that stock market returns do not resemble a single-index structure. (a) Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 2,000 stocks in order to construct a mean-variance efficient portfolio constrained by 2,000 investments. They will need to calculate (N) 2000 expected returns, (N)2000 variances of returns and 1,990,000.covariances.
Explanation:
- The expected returns of each of the 2000 securities must be calculated so as to get the detail variation of each stock i.e. to include all the 2000 stock.
- The 2000 variances around these stock returns must be calculated.
- We will calculate the covariance by the below formula
Covariance=(n2 − n)/2
Here N=2000
Covariance=(4,000,000 − 150)/2 = 1,990,000.
Ans 2 ): Assume that stock market returns do follow a single-index structure. An investment fund analyzes 2,000 stocks in order to construct a mean-variance efficient portfolio constrained by 2,000 investments. They will need to calculate (N)2000 estimates of expected returns and (N)2000 estimates of sensitivity coefficients to the market factor (betas).
Explanation:
For a single-index model, N=2000, expected returns and N=2000 sensitivity coefficients to the market factor (betas) must be estimated.
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