Finance Junkie
Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm


Postby anbu.edu » Sun Oct 06, 2013 11:45 am

You are given the following information about the returns of stock P and stock Q:
1. Variance of return of stock P=100.0
2. Variance of return of stock Q=225.0
3. Covariance between the return of stock P and the return of stock Q=53.2
At the end of 1999, you are holding USD 4 million in stock P. you are considering a strategy of shifting USD 1 million into stock Q and keeping USD 3 million in stock P. What percentage of risk is reduced?
Choose one answer.
a. 9.50% Incorrect
b. 5.00% Correct
c. 7.40% Incorrect
d. 0.50% Incorrect
The correct answer is 5.00%.
sportfolio= Sqrt(w2 sa2+ (1-w)2 sb2+ 2w(1-w) *sa *sb *correlation(a,b))
=SQRT(( 0.75)2*100 + (0.25)2*225 + 2*(0.75)*(0.25)*53.2) = 9.50;

SD before is SQRT of 100 =10
New SQRT is 9.5 so the answer should be .5 right.. please help me

Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm


Postby pradeeppdy » Mon Oct 07, 2013 8:54 am

Yes, The calculation detail is.
Variance = (0.75)2 (100) + (0.25)2 (225) + 2(0.75)(0.25)(53.2) = 56.25 + 14.06 + 19.95 = 90.26

Standard deviation = (90.26) 0.5 = 9.50

Hence, the percentage of risk reduced = (10-9.5)/10 = 5.0%

Return to “FRM Part I”


Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.