What is the variance of an equally weighted portfolio? (There are two ways to do this)
o^2p = avg o^ 2 ((1-p) / n + p) o^2p = (1/n)avg o^2 + (n-1/n)avg cov
You got the 2nd one right, NICE! You got the 1st one almost right… -------------> s^2p = s^2[(1-p)/n + p)] I honestly had to doublecheck in the CFA books. It’s around page 373 in Bk 6. GOOD JOB!
Another one. Give me the formula to find out how much a client needs to be invested in the Market portfolio. (Hint: the investor’s risk aversion is “A” in this formula)
Is it: SD Client Portfolio = (Weight(Market)*SD Market)+Weight RFR Solving for Weight(Market) when given the other variables?
Wt in Client Portfolio= Std Deviation of Portfolio (Required) after Investment / Std Deviation of Market Portfolio Wt in Market = 1 - Wt. in Client Portfolio. Std Deviation of Portfolio required after investment is a measure of Risk Aversion of the investor.
i acutally have a question related to this. Would the formula below also work regarding the var of an equal weighted portfolio? O^2 x .5^2 + O^2*.5^2+2*.5*.5*O*O*(Corr 1,2)
This is not a well know equation. It’s on page 524 Volume VI, Reading 67: The Theory of Active Portfolio Management Essentially, the amount the investor is invested in the risky portfolio M = —> [E®portfolio M - Rf] / 0.01 x A x s^2portfolio M A = investor’s risk aversion, will be given to you. Smiley, Yah, I would guess so, although I would rather try what I know works. 