Answer: Daily returns prior to the most recent day are reflected in the EWMA calculation by the previous variance rate estimate.

## Explanation In the EWMA (Exponentially Weighted Moving Average) model for volatility estimation, the formula is: $$\sigma_t^2 = \lambda \sigma_{t-1}^2 + (1-\lambda)r_{t-1}^2$$ Where: - $\sigma_t^2$ = current variance rate estimate - $\sigma_{t-1}^2$ = previous variance rate estimate - $r_{t-1}^2$ = most recent day's squared return - $\lambda$ = smoothing parameter (decay factor) The key insight is that the **previous variance rate estimate ($\sigma_{t-1}^2$)** already contains information about all historical returns prior to the most recent day, with exponentially decaying weights. Each day's variance estimate incorporates information from all previous returns through the recursive nature of the formula. Therefore, daily returns prior to the most recent day are reflected in the EWMA calculation by the previous variance rate estimate, making option D correct. **Why other options are incorrect:** - **A**: False - Previous returns do influence the current estimate through the recursive structure - **B**: False - While λ determines the decay rate, previous returns are actually reflected through the previous variance estimate - **C**: False - The most recent day's squared return only contains information about that single day's return

Author: LeetQuiz Editorial Team