Motivation 78
Estimates of expected returns and covariances between the securities
Ä
compute efficient set
How can one get these estimates?
Sampling from past returns
Ä
(arithmetic) mean and sample
covariance
- Advantage: easy and fast- Disadvantage: sample size
Ä
sampling error
BUT sample size
Ä
probability that series of stock
returns doesn’t reflect the
contemporary character of
the firm
Single-period random cash flows: Factor models - Motivation