HW2_sol - -0.0235 and the kurtosis is 1.0446 The average...

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Kranner School of Management MGMT 411: INVESTMENTS Assignment #2 Solution 1. The following questions are based on the article “Diversification: A Bigger Free Lunch” by John Campbell. You can find the article on our course site. a) A well-known rule of thumb is that a 20-stock portfolio is adequately diversified. According to the article, is this rule of thumb still valid? If not, then what would be the new rule of thumb? The new rule of thumb has to be adjusted. Recently, more stocks are needed in a portfolio to achieve diversification, 50 or so. b) What has been happening in the market to cause the adjustment to the old rule of thumb? Explain in detail. The idiosyncratic volatility of individual stocks has increased over time. The average correlation between a pair of stocks has decreased. 2. The following two graphs plot the histograms of monthly and daily returns for Nokia for the period 2001:01-2009:12. The average monthly return for Nokia in this period is -0.00089. The skewness of the return is
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Unformatted text preview: -0.0235, and the kurtosis is 1.0446. The average daily return for Nokia in this period is 0. The skewness of the return is -0.2243, and the kurtosis is 5.6092. a) Does the monthly return of Nokia come from a normal distribution? Explain your answer in detail in order to receive full credit. The skewness and the kurtosis are not equal to the values for the normal distribution, so the distribution is not exactly normal. However, it could probably be approximated with a normal distribution. b) Does the daily return of Nokia come from a normal distribution? Explain your answer in detail in order to receive full credit. The skewness and the kurtosis are far away from the values of the normal distribution. It is clear from the graph that there are outliers both to the left and to the right of the mean. Therefore, the daily distribution of Nokia is not normal....
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