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1) Suppose that the returns of two stocks (A and B) have same standard deviation (30%) and correlation matrix: a) Describe how to set up
1) Suppose that the returns of two stocks (A and B) have same standard deviation (30%) and correlation matrix: a) Describe how to set up a Monte Carlo simulation for stocks A and B that takes into account their volatilities and correlation. How many brownian motions do you need to use? b) Now simulate only the first principal component (you have computed it already if you worked on the quiz). (Even when you are simulating a 2 dimensional vector you will only need 1 brownian motion for this). 1) Suppose that the returns of two stocks (A and B) have same standard deviation (30%) and correlation matrix: a) Describe how to set up a Monte Carlo simulation for stocks A and B that takes into account their volatilities and correlation. How many brownian motions do you need to use? b) Now simulate only the first principal component (you have computed it already if you worked on the quiz). (Even when you are simulating a 2 dimensional vector you will only need 1 brownian motion for this)
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