on page 28 under example 12, how come we have 0.8 ( 4%) + 0.2 (7%) = 4.6%? it said 80 percent on sample mean (= 7%), so should that be 0.8 (7%) + 0.2 (4%) = 6.4%?
It tricky, it says “80% on the sample mean, we would calculate the overall mean return as 7% and the shrinkage estimate of the FIRST ASSET’s return as 0.8(4%) + 0.2(7%) = 4.6%.” The 5 sample means it provided were for 5 differetn asset classes. The overall mean of the 5 is 7%, we then apply a shrinkage estimate to the first asset class (say bonds) mean return of 4%. Poor wording.
Thanks, hope it won’t happen on the exam.