Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments.They will need to calculate _____________ expected returns and ___________ variances of returns.
A)100, 100
B)40, 40
C)4950, 100
D)4950, 4950
E)none of the above

Question

Quizplus · Accepted Answer

Since stock market returns do not resemble a single-index structure, the investment fund will need to calculate the expected returns and variances of returns for each of the 40 stocks separately. Therefore, the correct answer is to calculate these values for 40 stocks, resulting in 40 expected returns and 40 variances. Option B is the only choice that provides for the correct number of calculations. Option A has too many calculations for both values, and options C and D have an incorrect number of calculations for the expected returns. Option E is not a valid choice as it does not provide any answer.

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