2 Question 2 Given the six years of percentage linear return from Stock 1, 2 and

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2 Question 2 Given the six years of percentage linear return from Stock 1, 2 and 3 in the following table Year Stock 1 ret 2013 2014 2015 2016 2017 2018 urn Stock 2 return Stock 3 return 0.10 -0.15 0.20 0.25 -0.30 0.20 0.20 0.20 0.10 0.30 -0.20 0.60 0.05 0.3 0.25 0.1 0.4 0.15 1. Calculate the unbiased estimates for the 3 x1 vector of expected returns and the 3 3 variance-covariance matrix Vo 2. For a generic 3x 3 variance covariance matrix V,-| 1,2,0 1,0 I,2,0 1.3,0 20 2.3,01 compute diag(Vo)- vodiag(Vo) a1,1 a1,2 a13 . hint: given matrix Aa21 a2,2 a2 then as1 as2 asa a1i 0 1,1 diag(A)0 a22 0 and diag(A)- 0 0 a3,3 0 3,3 3. What is it that you just computed? using the table above compute and interpret each value of each entry of the new object

Explanation / Answer

1)

a = c(.1,-0.15,0.2,0.25,-0.30,0.2)
> b = c(0.20,-0.20,-0.10,0.30,-0.20,0.6)
> c = c(-0.05,-0.3,0.25,-0.1,0.4,0.15)
> X = cbind(a,b,c)

cov(X)
        a      b           c
a 0.0500 0.051 -0.00850000
b 0.0510 0.104 -0.00600000
c -0.0085 -0.006 0.06541667

M_mean <- cbind(mean(a),mean(b),mean(c))
> M_mean
     [,1] [,2]       [,3]
[1,] 0.05 0.1 0.05833333

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