These formulus look quite cumbersome. Don’t know if even worth it to do it on the exam or just guess. Might waste too much time unless their is a shortcut on BA II Plus
Correct me if I’m wrong, but I don’t think there are any shortcuts for covariance or variance for 2 asset portfolios. You just have to memorize those formulas and solve the question in the old fashioned way 
Here’s a link that might help you with any other shortcuts: http://www.youtube.com/watch?v=ZYUPhpY_QD0
Try that tutorial, for me it was very fundamental and very very very time savings on a lot of calculations.
there is a short cut for covariance (only for portfolio with 2 assets) which is moslty what you are asked to do so its cool.
How to do it: calculator does not give you cov directly but it does compute the two stds and correlation for you. You just have to multiply them and get cov.
In data: enter returns of asset 1 in X and those of assets 2 in Y
In stat: leave 1-V function and go to LIN when you scroll, you’ll get Std of A (in % you have to divide by 100) and Std of b (also in %),==> scroll again you will see correlation (in correct value)
Cov= correlation*stdA*stdB
you can try it
What’s the difference between 1-V and LIN?
That’s an awesome website hamada.smaili!!! Definitely bookmarking that
Dude, my advise…memorize the formula as you will use it intensively in all levels…including some nice variations on L3 used for exchange rate and foreign assets…
i don’t know what the difference is, i just know that it works that way. I’ll be memorize formula later. For now Texas Instrument will do
1-V is one-variable statistics. Say you were given 10 prices and wanted to find the stats for that 1 variable. Std Deviation, or variance.
LIN = Linear Regression of 2 variables - and then you will find sx, sy and r (correlation) and thus find covariance.
Can you explain this more. I am attempting to calcuate a the standard deviation, where I am given the covariance of the two assets.
provide the full problem please.
For Example : Two companies. Company A has a std. dev, of 30% and portforlio weight of 68% and Comp B has a std. dev of 20% and a weight of 32%.
Is it possible to solve this using our calculators?
I don’t think you can. You simply have to know the formula.
The calculator based methods proposed above don’t account for the fact that a probability is associated with asset returns. For example try solving this problem:
There is a 70% chance that the economy will be good… and if so return of A will be 30% and return of B will be 20%
There is 30% chance that the economy will be bad… and if so return of A will be -10% and return of B will be 0%.
What is the covariance?
While I’m generally a fan of using the calculator to save time and get the right answer… but in this case I feel it is better to use the formula.
If there is a problem like this on the exam I’m sure the CFA Institute will keep the numbers simple. The idea is to check your concepts… not your arithmetic skills.
Regards,
Arif Irfanullah
For what I have figured out till now:
T.I. BA II Plus will not calculate Covariance. Atleast not directly. Follow the steps below to calculate Covariance keeping in mind that it will not work if the question is related to probablity.
--------2nd+DATA
--------Input value of X in X1, X2, X3…so on
--------Input value of Y in Y1, Y2, Y3…so on
--------2nd+STAT
--------2nd+SET til you get “LIN” on display
--------Press Arrows to go through values. Look for Standard Deviation of X and Y and the Corelation between X and Y
--------Covariance=Corelation*StandardDeviationX*StandardDeviationY
Please not it will not work if the answer is related to probablity. Another thing you have to keep in mind is this method is for portfolios with two securities. That is why we can find the value using the “LIN” (Short for Linear) function in the calculator.
Hope it helps someone.
you will be able to make these calculations in your sleep by the time you are done reviewing. I didnt even feel like I memorized this formula, after a while you just walk through the process.
Free points buddy, memorize them.
Agreed with everyone else. Once you do a few of these it really isnt bad to memorize, the formula just LOOKS scary. Just write it out every time you do the problems and you’ll have it down in no time.
Hi Hamada samaili,
Thank you for this tutorial. It seems that it is gonne be very useful.
Chokran jazilan
Agreed. using the formula is better.