Question: Convert you daily stock return data into monthly average return and monthly sample standard deviation. Then use the lag techniques presented in class and written up in the Week4 Review of Class June5 Part 1 to see if your results parallel those for IBM. In the case of IBM, something quite interesting emerged: the current month’s average daily return on IBM is not special in terms of forecasting the following month’s. But, the current month’s sample standard deviation of daily returns is a strikingly better forecast of next month’s standard deviation than is the previous month. Thus, the structure of reward for IBM and risk for IBM is quite different, and differs in ways that are both simple and profound.

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