FRM Part I · FRM Exam Part I · Measures of Financial Risk
A portfolio manager has a daily return standard deviation of 1.5% and assumes returns are i.i.d. With 250 trading days per year, what is the approximate annualized standard deviation?
Annualized standard deviation is about 23.72%. Under independent, identically distributed returns, variance grows linearly with time, so volatility scales with the square root of 250 trading days: 1.5% times 15.811 gives 23.72%.
- A23.72%Correct
- B375.0%
- C1.50%
- D5.63%
Explanation
Under i.i.d. returns, volatility scales with the square root of time: 1.5% * sqrt(250) = 1.5% * 15.811 = 23.72%. Multiplying by 250 (375%) wrongly scales volatility linearly. The 5.63% figure uses sqrt(14)-type scaling that has no basis here.
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