I need to compute a covariance matrix using three years of stock returns from a portfolio which has a couple of stocks with only one or two years of history (being relatively new stocks).
Should I replace the missing data with zeroes, or should I omit the offending stocks from my VaR calc?
edit: I'm interested in knowing how other quants deal with this common occurrence. To put it in context, I'm the sole quant at an old-school, long-only stock-picking firm. I like to keep risk metrics like VaR simple enough to explain to my bosses, but they still need to be correct.