2. (20 pts) Suppose that simple return of a monthly stock index follows an AR dynamics, xt=0.01+t+0.2xt1,whereti.i.d.N(0,1). a) What is the mean of the simple return of this monthly stock? b) What is the variance of the simple return of this monthly stock? c) Consider the forecast origin h=100 with x100=0,x99=0.2,x98=0.4. Compute the 1 -step-ahead forecast of the simple return at the forecast origin h= 100. d) Provide two features of AR models. 2. (20 pts) Suppose that simple return of a monthly stock index follows an AR dynamics, xt=0.01+t+0.2xt1,whereti.i.d.N(0,1). a) What is the mean of the simple return of this monthly stock? b) What is the variance of the simple return of this monthly stock? c) Consider the forecast origin h=100 with x100=0,x99=0.2,x98=0.4. Compute the 1 -step-ahead forecast of the simple return at the forecast origin h= 100. d) Provide two features of AR models