If an analyst has to estimate 65 parameters using covariances, the number of securities he is considering for inclusion in the portfolio is
A) 20.
B) 30.
C) 5.
D) 10.

Question

Quizplus · Accepted Answer

Assuming the analyst is using a covariance matrix, the number of parameters needed to estimate the covariance matrix is equal to n(n-1)/2, where n is the number of securities. Solving for n in this case gives us:

65 = n(n-1)/2
130 = n^2 - n
n^2 - n - 130 = 0
(n-10)(n+13) = 0

Since n cannot be negative, we can conclude that n = 10. Therefore, the analyst is considering 10 securities for inclusion in the portfolio.

If an Analyst Has to Estimate 65 Parameters Using Covariances