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3.    Let Rt denote the simple monthly return and assume that

Rt ~ iid N(µ,ó ). Consider

2


the 2-period simple return


Rt (2) = (1+ Rt )(1+ Rt −1) −1.



a. Assuming that cov(Rt , Rt −1) = 0 , show that E[Rt Rt −1] = µ 2 .


Hint: Use cov(Rt , Rt −1 ) = E[Rt Rt −1 ] − E[Rt ]E[Rt −1].



b. Show that E[R (2)] = (1+ µ)2 −1



c. Is Rt (2) normally distributed? Why or why not?

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