Question

An investment fund analyses 60 stocks in order to construct an optimal portfolio constrained by 60 stocks. They will need to calculate ____________ variance-covariances matrix parameters using Markowitz portfolio theory and ____________ parameters using single index structure.

	A.	1800; 60
	B.	1830; 182
	C.	60; 60
	D.	60; 182
	E.	1830; 60

Answer 1

parameters in Variance - Covariance matrix = Co-Variance parameters + Variance parameters

parameters in Variance - Covariance matrix = [(60^2) / 2] + 60 / 2

parameters in Variance - Covariance matrix = 3600/2 + 60/2

parameters in Variance - Covariance matrix = 1830

Single Index Model Formula = Risk Free Rate + Beta * (Market return - risk Free Rate) + Error

here risk free rate, market return are fixed but error and beta will 60 each for 60 stocks

thus parameters = 1 + 1 + 60 + 60

thus parameters = 182

Option B 1830;182