CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
A stock has a total variance of 0.0625 and a correlation with the market of 0.60. The proportion of its variance that is nonsystematic, and the nonsystematic variance, are most likely closest to:
The nonsystematic share is 64% and the nonsystematic variance is 0.0400. The squared correlation of 0.36 is the systematic portion of variance; the remaining 0.64 times total variance of 0.0625 equals 0.0400.
- A36% and 0.0225
- B64% and 0.0400Correct
- C84% and 0.0525
Explanation
Systematic proportion = R-squared = 0.60^2 = 0.36, so nonsystematic share = 0.64. Nonsystematic variance = 0.64 x 0.0625 = 0.0400. Option A reports the systematic share and variance (0.36 x 0.0625 = 0.0225). Option C subtracts the correlation (0.60) from one incorrectly... in effect using 1 - 0.16.
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