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Up2
In CFA level 2 – portfolio management it says, by definition
Var(Portfolio) = Var(active return) + Var(benchmark).
Shouldn’t there be a another term like -2*Weight of portfolio * Var(benchmark) in this equation ??
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Up0
The equation you’ve presented, Var(Portfolio) = Var(active return) + Var(benchmark), is missing a critical term for portfolio variance calculation in CFA Level 2.
The missing term accounts for the covariation between the active return and the benchmark return. This covariation reflects how the active return and the benchmark move together.
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Up0
@shell shockers online The complete formula for the variance of a portfolio’s return is:
𝑉
𝑎
𝑟
(
𝑃
𝑜
𝑟
𝑡
𝑓
𝑜
𝑙
𝑖
𝑜
)
=
𝑉
𝑎
𝑟
(
𝑎
𝑐
𝑡
𝑖
𝑣
𝑒
𝑟
𝑒
𝑡
𝑢
𝑟
𝑛
)
+
𝑉
𝑎
𝑟
(
𝑏
𝑒
𝑛
𝑐
ℎ
𝑚
𝑎
𝑟
𝑘
)
−
2
∗
𝑊
𝑒
𝑖
𝑔
ℎ
𝑡
𝑝
𝑜
𝑟
𝑡
𝑓
𝑜
𝑙
𝑖
𝑜
∗
𝐶
𝑜
𝑣
(
𝑎
𝑐
𝑡
𝑖
𝑣
𝑒
𝑟
𝑒
𝑡
𝑢
𝑟
𝑛
,
𝑏
𝑒
𝑛
𝑐
ℎ
𝑚
𝑎
𝑟
𝑘
)
Var(Portfolio)=Var(activereturn)+Var(benchmark)−2∗Weight
p
ortfolio∗Cov(activereturn,benchmark)
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