CFA Practice Question

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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?

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.

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!
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