Schweser pg. 300 problem #6. How do they get the o^2(e) to equal .1333.
Page 300 of which of the Schweser books?
Basically, we need to calculate the variance of the Active portfolio comprising of AT and HC [since those are the misprices stocks, they will form the active portfolio]. var = w(at)^2 * var(at)^2 + w(hc)^2 * var(hc)^2 + correlational component that finally turns out to be O as this is was one of the assumption of the Market Model, that correlation across the various company stocks is zero therefore, var = w(at)^2 * var(at)^2 + w(hc)^2 * var(hc)^2 + 0 = (0.67)^2 * (0.20) + (0.33)^ * (0.40) + 0 [weights from question 4] = 0.1333
on page 302, it has the explanation (as dinesh has outlined)…its just confusing because they use .1333 before they calc it later in the explanation. I had the same WTF reaction.