Answer: σₙ² = (1 - λ)rₙ₋₁² + λσₙ₋₁²

**Explanation:** The solution states: "The EWMA formula is: σₙ² = (1 − λ)rₙ₋₁² + λσₙ₋₁²" **EWMA Formula Components:** - σₙ² = current variance estimate - rₙ₋₁² = squared return from previous period - σₙ₋₁² = previous variance estimate - λ = decay factor (0 < λ < 1) **Key Points:** - The weight (1 - λ) is applied to the most recent squared return - The weight λ is applied to the previous variance estimate - This creates an exponentially decaying weighting scheme where more recent observations receive higher weights - The formula uses the previous period's return (rₙ₋₁²), not the current period's return

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