FRM Part II · FRM Exam Part II · Portfolio Risk: Analytical Methods
A portfolio has total volatility of 12%, and a regression on market returns gives an R-squared of 0.64. What is the portfolio's residual (idiosyncratic) volatility?
Residual volatility is total volatility times the square root of one minus R-squared: 12% x 0.6 = 7.2%. The unexplained variance share is 36%, and its square root is 60% of total volatility.
- A7.2%Correct
- B4.3%
- C8.0%
- D6.0%
Explanation
Total variance = 0.0144. Residual share = 1 - 0.64 = 0.36, so residual variance = 0.005184. Square root = 0.072, or 7.2%. Option 8.0% mistakenly uses volatility times 0.64 ... wrongly mixing variance share with volatility.
Did you get it right without looking?
One question tells you little. A timed set on Portfolio Risk: Analytical Methods shows your real accuracy, how long you take and where you lose marks.
More Portfolio Risk: Analytical Methods questions
- A risk manager runs a regression of a fund's excess returns on the market's excess returns and obtains an R-squared of 0.64 and a total fund…
- A portfolio manager uses a single-factor market model. Stock A has a beta of 1.2 and residual volatility of 10%. Market volatility is 15%. W…
- A portfolio has two positions with weights 60% in A and 40% in B. Volatilities are 10% for A and 20% for B, with correlation 0.25. Portfolio…
- A risk manager notes that a portfolio's 95% VaR is USD 4 million. Which interpretation is correct?
- A portfolio's VaR is $10 million. Position X has a component VaR of $6 million and a standalone VaR of $5 million. Which conclusion is most …
- A portfolio manager's fund returns exceeded the benchmark's returns by the following amounts over four periods: +2%, -1%, +3%, 0%. Ignoring …