# 2014 CFAI MOCK 3 CME Question

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.

Both look OK but have inconsistent set of numbers.

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.

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.