13-Regression

13-Regression - Regression Statistics Rule #3 If X and Y...

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Unformatted text preview: Regression Statistics Rule #3 If X and Y are random variables a and b are constants Z=aX+bY Then Var(Z)=a 2 Var(x)+b 2 Var(y)+2abCov(x,y) Works for both parameters calculated from a PDF, and parameters estimated from a random sample. Statistics Rule #3: application If r 1 and r 2 are random variables w 1 and w 2 are constants (portfolio weights) r p = w 1 r 1 + w 2 r 2 Then Works for both parameters calculated from a PDF, and parameters estimated from a random sample. ) , ( 2 2 1 2 1 2 2 2 2 2 1 2 1 2 r r Cov w w w w p + + = Use stat rule #3 Use stat rule #3 to find the variance of a portfolio 80% in IBM, 20% in market index fund From before: E[IBM]=8.2 E[MKT]=2.65 Cov(mkt,IBM)=51.17 2 (IBM)=178.36 2 (MKT)=71.53 55 . 11 39 . 133 39 . 133 17 . 51 ) 2 )(. 8 (. 2 ) 53 . 71 ( 2 . ) 36 . 178 ( 8 ....
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13-Regression - Regression Statistics Rule #3 If X and Y...

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