FRM Part II · FRM Exam Part II · Portfolio Risk: Analytical Methods
A portfolio manager uses a single-factor model in which a stock's return is the sum of a beta times the market return and a residual term. The portfolio has a beta of 1.2 and the market's annual volatility is 15%. Ignoring residual risk, what is the portfolio's systematic volatility?
Systematic volatility is beta multiplied by market volatility, so 1.2 times 15% gives 18.0%. Beta scales market standard deviation linearly. Squaring beta applies to variance, not volatility, and dividing by beta reverses the relationship.
- A12.5%
- B15.0%
- C18.0%Correct
- D21.6%
Explanation
Systematic volatility equals beta times market volatility: 1.2 x 15% = 18.0%. Using 15%/1.2 = 12.5% inverts the relationship. Squaring beta and multiplying (1.44 x 15% = 21.6%) mixes variance with volatility.
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