Chapter 7 · Section 4 practice

Covariance Shrinkage and Cluster Allocation

0 of 2 answered

These questions review the examples in the companion slides. Choose an answer, then check the explanation.

Question 1

For 21 correlated ETFs on 251 daily returns, the condition number \(\lambda_{\max}/\lambda_{\min}\) of the sample covariance will be of the order of…

  • 1–10: daily returns are nearly uncorrelated
  • 50–100
  • Thousands — the smallest eigenvalues are almost pure noise
  • Infinite — 21 assets need more than 251 days to invert

Question 2

Before running: which rule will have the lowest volatility, and which the highest turnover?

  • Lowest vol: HRP; highest turnover: equal weight
  • Lowest vol: min-variance (sample); highest turnover: min-variance (sample)
  • Lowest vol: equal weight; highest turnover: HRP
  • Lowest vol: min-variance (LW); highest turnover: HRP