CA Final · Advanced Financial Management · Portfolio Management
A single-factor model gives the return of Stock Y as Ri = 2% + 1.2 F + ei, where F is the factor return. The factor has a standard deviation of 10%, and the residual standard deviation of Stock Y is 8%. What is the total variance of Stock Y (in %-squared)?
Total variance is 208 (%-squared). Systematic variance is beta squared times factor variance, 1.44 x 100 = 144, and residual variance is 8 squared = 64. Adding the two gives 208.
- A208Correct
- B144
- C64
- D272
Explanation
Systematic variance = 1.2^2 x 10^2 = 1.44 x 100 = 144. Unsystematic variance = 8^2 = 64. Total = 144 + 64 = 208. Option 144 ignores residual risk; 64 ignores systematic risk; 272 wrongly adds 128 (using 1.2 x 10 squared incorrectly).
Did you get it right without looking?
One question tells you little. A timed set on Portfolio Management shows your real accuracy, how long you take and where you lose marks.
More Portfolio Management questions
- Mehta Family Office invests 40% of a portfolio in Equity Fund A with an expected return of 12% and 60% in Equity Fund B with an expected ret…
- In a Fama-French style three-factor model, which set of factors is used to explain portfolio returns?
- Sundaram Asset Managers reports that its Balanced Fund earned an average return of 14% with a standard deviation of 16%. The risk-free rate …
- Under a two-factor APT model, the risk-free rate is 6%, the risk premium for factor 1 (GDP growth) is 4% and for factor 2 (inflation surpris…
- Meera follows a constant ratio plan with a 50:50 split between equity and bonds. She starts with Rs 5,00,000 in each. Equity later rises to …
- Under a two-factor APT model, the risk-free rate is 6%. Factor 1 (industrial output) has a risk premium of 4% and factor 2 (interest-rate mo…