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Level III
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Capital Market Expectations
Capital Market Expectations
Medium
An analyst needs to estimate a covariance matrix for 50 asset classes but has only 36 monthly observations. What problem will most likely arise, and what is the standard remedy?
A
The sample covariance matrix will be singular; use a factor-model covariance matrix instead
B
The mean estimates will be imprecise; use daily data to increase observations
C
The correlations will be biased upward; apply a shrinkage estimator to the correlation matrix
D
The matrix will exhibit negative eigenvalues; use bootstrapping to generate additional samples
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Tags
#covariance-matrix
#factor-model
#singularity
#sample-size
#cme-challenges
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