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2.1.2 Methodology:
1. The return of our stock is given as ??= ?+ ???+ ?, where:
???= ?+ ????,???= ?2???+??2,?~?(0,?2)
2. In order to determine ? and ? for each stock, we can run a least-squares regression on EXCEL. This will look to minimise the quantity?(???(?+ ???))2.
3. We then use our values of ? and ? for each stock to calculate the respective means and variances.
4. Note that??2= ????? ???????? ??? ?? ??????????1, where df is the total degrees of freedom (number of data points, which is 240). The total residual sum of squares can be inferred from the regression output in the ANOVA table.
5. To calculate the covariance between stocks:
??? (??1,??2)=??? (?1+ ?1??+ ?1,?2+ ?2??+ ?2)= ?1?2???(??,??)= ?1?2??

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