Question of the Week – Portfolio Management

I got confused…  anyone, could tell the general formula of portfolio standard deviation ??? thanks 🙂

Yup, this is a bread and butter calculation in terms of CFA exams…everyone should make sure they know how to calculate this, and also why it is calculated this way. Knowing why, as well as how will stand you in good stead.

I would also highlight the interaction between correlation, beta, variance and standard dev. I had the below all on one card:

correlation (p)  = Cov1,2 / (sigma_1) (sigma_2)

Beta (b) = Cov1,2 / Variance_market

Beta (b) = (p) (sigma_1) / Sigma_market

The above mentioned formula: (sigma_p)^2 = (w_1)^2 *
(sigma_1)^2 + (w_2)^2 * (sigma_2)^2 + 2(w_1)(w_2) * Cov(R_1, R_2)

I passed level 1 last year and still remember these formulas. I had this index card stock to my monitor at work. I had other cards stuck in the bathroom, on my desk for when I got up in the morning, etc. Hopefully this will help some of you too 🙂

Darn haha. Tried doing the math in my head. I’ll stick to the BA2 going forward lol.  

Stupidly misread ‘covariance’ as ‘correlation’ and multiplied it by the standard deviations.