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Suppose that the current daily volatilities of asset A and asset B are 1.6% and 2.5%, respectively. The prices of the assets at close of
Suppose that the current daily volatilities of asset A and asset B are 1.6% and
2.5%, respectively. The prices of the assets at close of trading yesterday were
$20 and $40 and the estimate of the coefficient of correlation between the
returns on the two assets made at that time was 0.25. The parameter used
in the EWMA model is 0.95.
- Calculate the current estimate of the covariance between the assets.
(b) On the assumption that the prices of the assets at close of trading today are $20.50 and $40.50, update the correlation estimate.
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