Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 125 stocks in order to construct a mean-variance efficient portfolio constrained by 125 investments. They will need to calculate ____________ covariances.
A) 125
B) 7,750
C) 15,625
D) 11,750

Question

Quizplus · Accepted Answer

The number of covariances needed for N stocks is calculated using the formula N(N-1)/2. For 125 stocks, this equals 125*124/2 = 7,750. Covariances are needed to understand how pairs of stocks move in relation to each other.

Assume That Stock Market Returns Do Not Resemble a Single-Index