2014 CFAI MOCK 3 CME Question

CFA Level III Economics
#1

Question 1 CME From CFAI 2014 mock exam (the Litman version or version C)

I used different method reaching at different number, but I am still not sure where I got wrong.

Method 1 : Covariance = correlation * std dev(us real estate) * std dev(gim)

0.0075 = 0.39 * 0.14 * std dev(gim) => solving for std dev(gim) = 0.1373

beta = correlation * std dev(us real estate) / std dev(gim) = 0.39 * 0.14 / 0.1373 = 0.3974

Method 2 (solution) : Sharpe Ratio (gim) = 0.36 = ERP(gim) / std dev(gim),

and because ERP(gim) = 7.2 (expected return) - 3.1 (Risk-free rate) = 4.1%

solving for std dev(gim) = 11.388% = 0.11388

beta = covariance / var(gim) = 0.0075 / (0.11388)^2 = 0.58

Could anyone tell what went wrong in method 1 ??

Question 3 CME From CFAI 2014 mock exam (the Litman version or version C) how can we tell from the passage that Residual Risk(%) is written in Variance Term instead of Std. Deviation Term. Is it always the case that risk term should be interpret in Variance? Thanks.

#2

Both look OK but have inconsistent set of numbers.

#3

Yeah I solved it this way initially. It’s just an inconsistent quesiton b/c the convariance calculation given the std dev’s and correlations does not equal the 0.0075 they give as covariance. have to figure the real exam wouldn’t have inconsistencies like this.

#4

I think it’s a reading issue. It states that assume correlation for the singer taharr is .39. Therefore that info isn’t consider to the first question.