Anyone else just skipping these crazy formulas?!
There have been a few multi choice questions on the mocks I’ve seen, but I don’t mind just guessing it if there is. What I’m worried about is the tiny risk of 8 marks in the morning for it - is that even possible? I’ve never seen any of that stuff in the 6 morning exams I’ve done.
Anyone else ditching these?
They’re not that different from the formula for two asset portfolio variance.
I could see myself memorising the variance one on that basis, but the covariance seems an extra dimension of pain.
One of the few things I’m not bothering with. Will visit on thur/fri if I am feeling good
It’s not that bad, but only if you practice. Don’t look at formula, just see what number they plugged in in the answer. With covariance, you have 2 markets, each of which have 2 asset categories. First you want to calculate combined effect of markets per asset category: 1) multiply betas of each market for Equity and the variance of Equity. That’s your (Beta of equity market A × Beta of equity market B × variance of Equity). 2) do the same for bonds. 3) add point 1 +2 Then you want to calculate combined effect for both 2 markets and 2 asset categories, so this is where covariance of asset categories comes in place, but you need to adjust it for the Betas. I treat this as cross multiplication: 4)Beta of Equity Market A × Beta of Bond Market B (it is easier to see in the table - you would just cross multiply) 5) Beta of Equity Market B × Beta of Bond Market A (again multiply across in the table) 6) add point 4&5 7) multiply point 6 × covariance between bond and equity. The last step is to add points 3 and 7. It really looks just hard, so much easier with the table. Just practice couple of times.