you do not want to run the risk of falling below 2 standard deviations.
read the chapters in order to see where this is. You are unlikely to find this in any one chapter (reading). remember you could get a question in Individual IPS that deals with something from the RIsk Management or Asset Allocation chapters. there is a gradual build up of material in Level III - and the material may either be tested in isolation, in conjunction with some other topic OR not at all.
there are broad common linking themes across the curriculum.
Confused where this formula came from as well. How do you determine from the question that you don’t want the return to fall below 2, instead of 1 or 3, standard deviations?
Is it because the expected standard deviations of x, y and z are all around 10%?
Thanks, what in the question prompts you to know you want 90% / 2 standard deviations as opposed to other amounts? I need it broken down as basic as possible haha.
5% shortfall is the standard, if your portfolio falls outside 2 standard deviations, then there is significant shortfall risk, and you adjust accordingly.
3 standard deviations is too conservative, and will likely reject a lot of options, 1 standard deviation is too risky, as it may wall fall below the 1 standard deviation frequently.
Gotcha, I was thrown because I used roys safety first ratio to answer this question and I felt pretty good that I had approached it right. I realize it’s similar concepts but not sure if graders see it same way.