3 asset portfolio variance/standard deviation calculation

Do we need to know how to calculate 3 asset portfolio variance? Given the high probability of only getting 6 problems on the exam, I’d think it’s almost irresponsbile to test such a useless calculation…but saw 2 problems on the CFAI online tests. Any thought?

It’s an easy calculation, it just looks intimidating. :slight_smile:

I think yes. At least for me it’s just time consuming, not difficult. I don’t have a faster way to do it but in case I have to do the calculation (i.e. No clue to make a guess), I always break them into 4 parts:

Part 1: (w1*s1)^2 + (w2*s2)^2 + (w3*s3)^2 = A

Part 2: 2*w1*w2*p12*s1*s2 = B

Part 3: 2*w1*w3*p13*s1*s3 = C

Part: 4 2*w2*w3*p23*s2**s3 = D

then sum up the 4 parts. It will easier to track if you make an error in calculating somewhere. If it shows up in the real exam, for me it’s a freebie (it’s useless though) ;))

^This is how I break it out in my head (four seperate parts) when I write out the formula but I always write it horizontally and for some reason never thought to write it vertically lol. I like your vertical version better.

OP, if you’re going with the formula above, don’t forget to take the square root of the sum if the question asks for std dev.

Agree with both replies. It may be on there but it’s just a time consuming freebie, not hard (unless you don’t know how to do the two asset std/var calculation).

yeap - I don’t see why you’re intimidated by it. It’s straightforward. 12 13 32 boom!

Thanks for the replies, one more formula to memorize! yay…

It’s just tedious, i hope they won’t bring this up in the exam…

Same for discount factors. J***s c****t, it’s so easy and tedious, it’s just a waste of time.

You mean for pricing swaps? I’ve basically resolved that unless I’m really weak on them, I’m only calculating them when I must-- that is, in a mock exam/practice test or the real exam. I don’t want to go out of my way to redo those EOCs…

I hope they give the discount factors instead of the LIBOR rates.

I hope there will be on the exam because it is one of the easiest things they could ask.

You have to remember 2 things and repeat them 3 times, that’s all

this may be a b.s. gmat type shortcut-

but on one of the mocks dey asked for the variance of a 3 assted portfolio and to save time i just took da square root of each answer and identified da trap and went ahead and just simply chose the answer that was the square of da other answer.

took like 6 seconds to calc vs. 4-5 min doin da cfai 3 asseted formula for port std dev

I’m more inclined to say that typing “da” instead of “the” is a bs gmat type shortcut.

lmao, real talk smagician.

appreciate everything u do for “da” boards- you tha man!

This doesn’t work at all. The answer of the square root of the other answer and the unsquare rooted may both be incorrect. You can probably eliminate the unsquare rooted answer though if they asked for std and guess 50/50 if you really don’t want to calculate it.

good lookin out brotha, i couldn’t remember the formula, so that’s just what i did. Guess I guessed right. I feel with the extreme breadth of this exam, I’ll take 50/50 everytime

yup, always gets me

But…nobody asks you to calculate discount factors only…

I don’t expect tedious calculations in the exam as well but for the fact that one point can make a huge different (i.e: 41/60 vs 42/60), I would rather do it to get a freebie.