Guys, I have a question for anyone that has done the Practice Exam 2 - AM Book 1 Schweser.

Question 45.

Based on the portfolio manager’s estimates of residual risk and residual return, the annualized valued added for portfolio IMI-KAY is *closest* to:

**A)** 0.35%. **B)** 0.88%. **C)** 1.40%.

**Your answer: C was correct!**

annual α = (0.5) × 4 = 2%; annual ω = (1) × = 2% VA = α − (λ × ω^{2}) = 2% − (0.15 × 2^{2}) = 1.4%

Alternatively, quarterly VA = 0.5 − (0.15 × 1^{2} = 0.35% annual VA = quarterly VA × 4 = 0.35% × 4 = 1.4%C

**Where does this ω = (1) × come from ?**

**Why the annual w isn`t 4% ? The question says: The portfolio manager anticipates that the portfolio will generate QUARTERLY residual return of 0,5% with a residual risk of 1%.**