Question number 59 on the CAIA’s practice test (the test posted on CAIA.org’s website) is causing me some confusion. It asks for the ANNUAL volatility of the portfolio given the information of 16 hedge funds and a QUARTERLY volatility of 10% for each fund. It seems simple enough: 10% divided by the square root of 16 to get the quarterly volatility, then find the annual volatility from there. My confusion relates to that conversion from quarterly to annually. Since we are viewing 4 quarters, should we multiply both the numberator and denominator by 4?..40% divided by the square root of 64? That process gives the answer they have marked as correct, but the answer explanation was not clear on how they went from quarterly to annually.
Any thoughts?
Thanks!