|Author||Topic: Portfolio Variance-- does it actually show up on exam?|
|I've been trying to memorize and understand the formulas for portfolio variance but its a pain in the ass.. especially when you put in a 3 asset portfolio. In your experience, has this question actually come up in the exam? It seems like a difficult problem not worth one's time (during prep and in the actual exam).
|I have heard that considering that you have 1.5mins on average to answer a question, you should not expect a 3 or 4 asset portfolio variance calculation, however you never know with the institute.... I'll advise to at least know the 2-asset calculation.
I think you dont need to memorise the 3 or 4 -asset calculation, as long as you know the 2-asset one and the logic behind it , even a 10-asset calcuation should not be an issue( provided that you have the time to do it of course!).
Note that in the matrix, all numbers on the diagonal are variances and the rest are covariances that are mirrored in the matrix. so the way you do it is,
1-Diagonal: sum of (asset weights to the power of 2 times the variance)
2-Triangle (Area above or below Diagonal): sum of (asset 1 weight times asset 2 weight times their Covariance) and since the triangle is mirrored you gotta multiply the result by 2
3-Add 1 and 2 above
Hope it makes sense.
|there realy is no such thing as 2 asset and 3 asset forumula..
in reality it is once formula for 2 assests and 1 million assets....
all you are doing in the 2 asset and 3 asset formula is
take each possible cov and multiply it by weights of i and j, then sum all of them
since the covar of i,i is var i, that is what you see var in the formulas,
it seems to me that attempting to simplyfy the formula actually complicates it
all you need to know is
sum all possible covars (inculding covar of asset with itself), multiply each one by weights of both assets, (even when that asses is itself), then sum them all
and that is the formula on page 393 Level II
|Hi, don't focus more on the complicated formula , rather focus on the concept of matrix multiplication. Still most probably you wouldn't find a 3 asset formula in the exam and I have seen two asset cases only.|
CFA Discussion Topic: Portfolio Variance-- does it actually show up on exam?
I was very pleased with your notes and question bank. I especially like the mock exams because it helped to pull everything together.