a3_soln - Assignment #3 Solution F08 Actsc 372 (total...

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Assignment #3 Solution F08 Actsc 372 (total marks: 45) 1. (15 marks) (a) 3, (b) 5, (c) 4, (d) 3 (a) Here are the additional assumptions for the calculations: monthly return is calculated discretely; i.e. r t = P t +1 P t - 1, where P t refers to the adjusted price at time t . (Alternatively, you can calculate return assuming continuous compounding so that the monthly continuously compounded rate is calculated as log( P t +1 /P t )). Unbiased estimators for variance and covariance are used; i.e. the sample covariance (similarly for variance) is estimated as 1 n - 1 n X i =1 ( x i - ¯ x )( y i - ¯ y ) where n denotes the number of samples, which is 96 in our problem. This implies that if you use the EXCEL function COVAR, you need to adjust the values by the factor n/ ( n - 1) since COVAR calculates covariance as 1 n n i =1 ( x i - ¯ x )( y i - ¯ y ) (However, I will accept either answer since the difference is quite small for large n ). TSE BMO PCA SLF RIM Monthly Expected Return 0.29% 0.59% 1.18% 0.52% 2.86% Variance/Covariance Matrix TSE BMO PCA SLF RIM TSE 0.17% 0.05% 0.15% 0.10% 0.45% BMO 0.05% 0.26% -0.03% 0.07% 0.08% PCA 0.15% -0.03% 0.60% 0.08% 0.25% SLF 0.10% 0.07% 0.08% 0.34% 0.38% RIM 0.45% 0.08% 0.25% 0.38% 3.44% (b) and (c) 3
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This note was uploaded on 09/18/2011 for the course ACTSC 372 taught by Professor Maryhardy during the Winter '09 term at Waterloo.

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a3_soln - Assignment #3 Solution F08 Actsc 372 (total...

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