Investment theory, class #3
Page 3 of 26
How much data should we collect?
® All rights reserved to Tal Mofkadi
Suppose your security analysts can thoroughly analyze 50 stocks. This means that
your input list will include the following:
n = 50 estimates of expected returns
n = 50 estimates of variances
– n)/2 = 1,225 estimates of covariances
Total of 1,325 estimates
This is a formidable task, particularly in light of the fact that a 50-security
portfolio is relatively small. Doubling n to 100 will nearly quadruple the number
of estimates to 5,150. If n = 3,000, roughly the number of NYSE stocks, we need
more than 4.5 million estimates.
And what if our portfolio is build from 10,000 assets?