practice problems-Nonstandard CAPM and APT
- Thread starter Mish
- Start date
Hi Mish,
Re Q63.2, yes that's true, although both are apply properties of the variance, so it might help to view both the weights in portfolio volatility, and the betas in APT, as applying the same variance rules.
In this case,
E[R(i)] = 0.6*E + 0.25*B
Just as variance(aX + bY) = a^2*variance(X) + b^2*variance(Y) + 2*a*b*Covariance: see http://en.wikipedia.org/wiki/Variance
Variance(E[R(i)]) = variance[0.6*E] + variance[0.25*B] + 2*0.6*0.25*Covariance(E,B);
Variance(E[R(i)]) = 0.6^2*variance[E] + 0.25^2*variance + 2*0.6*0.25*Covariance(E,B);
In a sense, you are correct to imply there is no real difference between weights and sensitivities, as far as this goes. I wrote these questions this way, fwiw, because GARP has two sample questions just like this ...
Re Q64.3: Ooops, my MISTAKE. You are correct, the answer should be (A) ... fixing and re-posting the PDF now. Thanks!
Re Q63.2, yes that's true, although both are apply properties of the variance, so it might help to view both the weights in portfolio volatility, and the betas in APT, as applying the same variance rules.
In this case,
E[R(i)] = 0.6*E + 0.25*B
Just as variance(aX + bY) = a^2*variance(X) + b^2*variance(Y) + 2*a*b*Covariance: see http://en.wikipedia.org/wiki/Variance
Variance(E[R(i)]) = variance[0.6*E] + variance[0.25*B] + 2*0.6*0.25*Covariance(E,B);
Variance(E[R(i)]) = 0.6^2*variance[E] + 0.25^2*variance + 2*0.6*0.25*Covariance(E,B);
In a sense, you are correct to imply there is no real difference between weights and sensitivities, as far as this goes. I wrote these questions this way, fwiw, because GARP has two sample questions just like this ...
Re Q64.3: Ooops, my MISTAKE. You are correct, the answer should be (A) ... fixing and re-posting the PDF now. Thanks!
mirage2012
New Member
Hi David,
Got it mixed up at the last lap with the formula! For real, we have quite a deluge of formulas to contend with in this exam and its expansive.Since we have to commit all these formulas to memory, do you have any exam-friendly route to achieving this?
i am currently studying book IV-Valuation & Risk Models and have come a cross quite a lot already.
Need insight to memorise all these formulas.. Any suggestions ALL
Thanks David for the great job so far!!!
Got it mixed up at the last lap with the formula! For real, we have quite a deluge of formulas to contend with in this exam and its expansive.Since we have to commit all these formulas to memory, do you have any exam-friendly route to achieving this?
i am currently studying book IV-Valuation & Risk Models and have come a cross quite a lot already.
Need insight to memorise all these formulas.. Any suggestions ALL
Thanks David for the great job so far!!!
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