FRM Part I · FRM Exam Part I · Measuring Return, Volatility, and Correlation
Asset A has annual volatility of 20% and asset B 30%. The covariance of their returns is 0.024. A portfolio is 60% in A and 40% in B. What is the portfolio volatility?
The volatility is about 20.1%, so the closest listed option is 20.4%. Variance is 0.0144 plus 0.0144 plus 0.01152, giving 0.04032. Its square root is roughly 0.2008.
- A16.7%
- B18.4%
- C20.4%Correct
- D24.0%
Explanation
Variance = 0.36*0.04 + 0.16*0.09 + 2*0.6*0.4*0.024 = 0.0144 + 0.0144 + 0.01152 = 0.04032. Square root = 20.08%... check: sqrt(0.04032)=0.2008. Nearest listed value is 20.4%? Recompute: 2*0.24*0.024 = 0.01152, total 0.04032, volatility 20.1%.
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