- CFA Exams
- CFA Level I Exam
- Study Session 18. Portfolio Management (1)
- Reading 53. Portfolio Risk and Return: Part II
- Subject 3. The Capital Asset Pricing Model

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**CFA Practice Question**

Which of the following measurements can be found for a portfolio by simply taking the weighted average of the individual components?

II. Return

III. Standard deviation

I. Beta

II. Return

III. Standard deviation

A. I and II

B. II and III

C. I, II and III

**Explanation:**Beta: a measurement of the volatility of a security with the market in general. A beta coefficient greater than 1 indicates systematic risk greater than the market, while a beta of less than 1 indicates systematic risk less than the market.

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**User Contributed Comments**
8

User |
Comment |
---|---|

murli |
I think the answer should be B. Because, CML uses weighted average approach for the Standard deviation of the portfolio, while I have not seen any weighted average of the Beta done. |

lemec |
A is correct. Using "Pure Play" method to find Beta, you averrage the betas of pure-play firms. Std Dev of a porforlio is not simply a weighted average of inv components. Tricky though! |

lemec |
Addition to previous comment: III would be correct only if correlation coefficient was 1 for all the assets in the portfolio. |

coops |
lemec is incorrect. pure play refers to determining betas for a specific company from a market or industry. Since this refers to the beta of a portfolio you cannot average them. The correct answer is B. |

gizi |
The answer is A. You cannot find a portfolio std dev. by just using the weighted average of the individual standard deviations. It is found by using the weighted average of the individual variances, PLUS the weighted covariances between all the assets in the portfolio. Remember the long formula? |

volkovv |
Gizi is correct. And as far as beta is concerned, you can find portfolio betas by taking a weighted average of the individual components! |

ThePessimist |
Excess return is equal to beta times the market risk premium. Therefore, if you can find the portfolio return by averaging, you logically must be able to find the portfolio beta by averaging. |

mghebrey |
Good one! |