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What were the steps taken to get from the first equation to the expression that's being multiplied by sigma ? 12.6.2 Impact of Autocorrelation In
What were the steps taken to get from the first equation to the expression that's being multiplied by sigma ?
12.6.2 Impact of Autocorrelation In practice, the changes in the value of a portfolio from one day to the next are not always totally independent. Define AP, as the change in the value of a portfolio on day i. A simple assumption is first-order autocorrelation where the correlation between AP; and AP;_, is p for all i. Suppose that the variance of AP, is o' for all i. Using the usual formula for the variance of the sum of two variables, the variance of AP_ + AP, is 02 + 02 + 2po? = 2(1 + p)o The correlation between AP_; and AP, is p'. Extending the analysis leads to the following formula for the standard deviation of CAP, (see Problem 12.11): oVT+2(T - 1)p + 2(T -2)p2 + 2(T -3)p3+ ...2pT-1 (12.5)Step by Step Solution
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