Spreadsheet 4.b.3
- Thread starter arteja
- Start date
Hi Ravi,
(if you are using Excel, one of my favorite tips is: CTRL+[ selects the precedent cells, then TAB cycles thru...so here, CTRL+[, Tab takes you right to the source cell)
r_avg is the average log return in the series, per the technically correct variance fomula:
sum of: (log return_i - average log return)^2 / (n-1)
...that's just the correct unbiased est of variance...as Hull shows, in practice for daily log returns, we make two simplifying assumptions
1. avg return = 0 (near enought to for daily periods) and
2. use (n) instead of (n-1)
to give a simplified formula for daily variance: average squared return! i.e., sum of [log return^2] / n
David
(if you are using Excel, one of my favorite tips is: CTRL+[ selects the precedent cells, then TAB cycles thru...so here, CTRL+[, Tab takes you right to the source cell)
r_avg is the average log return in the series, per the technically correct variance fomula:
sum of: (log return_i - average log return)^2 / (n-1)
...that's just the correct unbiased est of variance...as Hull shows, in practice for daily log returns, we make two simplifying assumptions
1. avg return = 0 (near enought to for daily periods) and
2. use (n) instead of (n-1)
to give a simplified formula for daily variance: average squared return! i.e., sum of [log return^2] / n
David
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