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Combining two noisy estimates optimally

Asked at Two Sigma

Two independent research groups each produce an unbiased estimate of the same fair value θ\theta: group one gives T1T_1 with variance v1v_1, group two gives T2T_2 with variance v2v_2. You will combine them linearly as T=wT1+(1w)T2T = wT_1 + (1-w)T_2.

What weight ww minimizes the variance of TT, and what is the resulting variance? Evaluate for v1=4v_1 = 4, v2=1v_2 = 1.

Show a hint

Any ww keeps TT unbiased, so just minimize Var(T)=w2v1+(1w)2v2\operatorname{Var}(T) = w^2 v_1 + (1-w)^2 v_2 over ww.

Your answer

This one is open-ended. Work it through, then check your reasoning against the full solution.

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