ADM 3352 Lecture Notes - Lecture 8: Explained Variation, Standard Deviation, Weighted Arithmetic Mean

• School: University of Ottawa
• Department: Administration
• Course: ADM 3352
• Professor: William F Rentz

Document Summary

To optimize this portfolio one would need: estimates of means estimates of variances estimates of covariances. The variance due to the common market factor i + b i(rm rf) + ei the variance of the rate. In a single-index model: ri rf = a of return on each stock can be decomposed into the components: (l) b (2) s 2(ei) the variance due to firm specific unanticipated events. In this model cov(ri,rj) = b would be: n = 60 estimates of the mean e(ri), n = 60 estimates of the sensitivity coefficient b n = 60 estimates of the firm-specific variance s 2(ei), and. Thus, the single-index model reduces the total number of required parameter estimates from 1,890 to 182 and in general from (n2 + 3n)/2 to 3n + 2. i: a. The standard deviation of each individual stock is given by i = [b.