Portfolio Management Q

CFA Level II
#1

Now DON’T check your formula sheet, whoever knows this one is my hero for the day. Consider an equally-weighted portfolio comprised of five assets in which the average asset standard deviation equals 0.57 and the average correlation between all asset pairs is -0.21. Calculate the variance of the portfolio.

#2

std^2 = 0.57^2(1+.21)/5-.21=0.0103968 i think.

#3

var = (1/n)*(avg asset variance) + ((n-1)/(n))*(covariance of assets) am I way off?

#4

Var = 0.57^2*(1/5+4/5*(-.21))=0.010397

#5

portfolio variance = 0.3249*((1-(-0.21))/5 -0.21) variance = 0.0104

#6

I get the same as maratikus. The trick is to remember to get COV and square the std for the first part of the equation.

#7

Wait, you get the same answer multiplying the correlation for the (4/5) just as the COV?

#8

schweser has the formula I used…I did it with just the variance and correlation

#9

Awesome gets the title with his calc which is identical (just mix it up a little) to the one from Dinesh. Great work team!

#10

deep2002 Wrote: ------------------------------------------------------- > schweser has the formula I used…I did it with > just the variance and correlation I didn’t use COV, I used correlation and variance only: Port variance = Sample Variance*((1-correlation)/n + correlation)

#11

mcpass Wrote: ------------------------------------------------------- > Awesome gets the title with his calc which is > identical (just mix it up a little) to the one > from Dinesh. > > Great work team! im a girl :frowning:

#12

What’s :frowning: about that???

#13

Hi Awesome, how are you ? :wink:

#14

dinesh.sundrani Wrote: ------------------------------------------------------- > Hi Awesome, how are you ? :wink: Im good, how are you?

#15

So dinesh, is this like the new place to pick up girls? Now get back to studying…

#16

haha wandering … you seem to have recovered well after the Break’up. You should try this out too… :wink:

#17

deep2002 Wrote: ------------------------------------------------------- > portfolio variance = 0.3249*((1-(-0.21))/5 -0.21) > variance = 0.0104 at the end of this formula, is it +r? so ((1-(-0.21))/5 ) + (-.21)? thx

#18
  • correlation.
#19

yes. portfolio_var = ave_var * { (1 - ave_rho)/n + ave_rho }

#20

(1/n)(avg var) + (n-1/n)(avg cov)