Asset class Global Equity sensitivity Global bonds sensitivity Residual risk Real estate equities 0.6 0.15 4.4% Other information Variance 0.025 0.0014

We are calculating the variance of real estate: 0.6^2 x 0.025^2 + 0.15^2 x 0.0014 + 2 x 0.6 x 0.15 x 0.002 + 0.044 Why in the answer does the formula add the residual risk at the end (4.4%)?

Are the sensitivitis standard deviations? 2. If the residual risk is included, do we always add it at the end? All the other variance questions I have seen do not include residual risk, hence why i haven’t seen it before.

As you post Variance .025 and in the formula you put .025^2 you are squaring the variance right? Yes you do my friend. When talking about ICAPM you do. As the textbook says (CFA way)