Li Itemset Mock A - calculating the new volatility

CFA Level III
#1

For the Li itemset, question 3, they are asking you to calculate the new volatility for SCIRP. I get the equation and formula except for one part. What is the variance of the error term??? How do they get 0.0770?

#2

They backed it out.

#3

This is the most weird question in all mocks I’ve done…

#4

After 30 mins I figured it out. And you’re supposed to do that in how many minutes???

#5

you actually do not need to back out stuff. (and you do not need to calculate either)

original SCIRP Variance with 0 correlation = 0.2704

now with 0.25 correlation - it is supposed to go up only. (Variance and hence std dev).

so new variance = 0.2704 + 2 (1.02) (1.045) (0.25) (0.28) (0.32) = 0.2704 + 0.0448 = 0.3181

std dev = 0.564

now if you look at the other answer choices - by elimination too you can do it.

31.8 and 49.1 rules themselves out - since 31.8%^2 < 0.2704 and 49.1%^2 = 0.241 < 0.2704

#6

^legend

#7

its the error term …