Cap Mkt Exp-Asst Val-Asset Alloc - CME Foundation -- Question on Correlation

CFA Level III Economics
#1

On the topic-based exam for “Capital Market expectations, Asset Valuation and Asset Allocation,” first item set, question 2 says that “Grey recommends using the Singer–Terhaar approach to the ICAPM and assumes a correlation of 0.39 between U.S. real estate and the GIM.”

I calculated the correlation as 0.49 by using the formula "Correlation(i) = Covariance(i,m) / Std Dev(i) * Std Dev(m).

So, correlation = 0.0075 / 0.14 * 0.11.

Correlation = 0.49.

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In case you ask, I calculated Std Dev(m) from the formula Sharpe Ratio(m) = [R(m) - R(f)] / Std Dev(m).

So, 0.36 = [7.2% - 3.1%] / Std Dev(m). Std Dev(m) = [7.2% - 3.1%] / 0.36.

Std Dev(m) = 11.4%

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So, my question is . . . why does Grey assume a 0.39 correlation, when using his data should calculate a 0.49 correlation?

Am I missing something?

THANKS!

#2

Probably nobody vetted the question well.

That happens. A lot.

#3

Ugh, thanks.

Pretty sad that I (a middling Level III candidate) would see an obvious error. It tripped me up, as for 5 minutes I was using my calculated correlation before I realized that they had stated the correlation in the question.

Thanks for the prompt feedback!