CFA CFA Level 1 Question of the Week – Portfolio Management

Question of the Week – Portfolio Management

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  • AdaptPrep
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    You are given the following portfolio:

    Company Name Amount invested Standard Deviation
    Isotics 15,000 0.3
    Ambiss 5,000 0.1

    The portfolio’s standard deviation, if the covariance is 0.05, is closest to:

    • 20%
    • 23%
    • 26%
    AdaptPrep
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    The portfolio standard deviation formula is:
    σp = √[(w1^2)(σ1^2) + (w2^2)(σ2^2) + 2(w1)(w2)Cov(R1, R2)]

    We have:
    w1 = 15,000 / 20,000 = 0.75
    w2 = 5,000 / 20,000 = 0.25
    σ1 = 0.3
    σ2 = 0.1
    Cov(R1, R2) = 0.05

    Therefore,
    σp = √[(0.75^2)(0.3^2) + (0.25^2)(0.1^2) + 2(0.75)(0.25)(0.05)] = 0.2645

    shannondaily
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    Woo! I got it right. 🙂 

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