I’ve been trying to memorize and understand the formulas for portfolio variance but its a pain in the ass… especially when you put in a 3 asset portfolio. In your experience, has this question actually come up in the exam? It seems like a difficult problem not worth one’s time (during prep and in the actual exam). Thoughts?
I have heard that considering that you have 1.5mins on average to answer a question, you should not expect a 3 or 4 asset portfolio variance calculation, however you never know with the institute… I’ll advise to at least know the 2-asset calculation. I think you dont need to memorise the 3 or 4 -asset calculation, as long as you know the 2-asset one and the logic behind it , even a 10-asset calcuation should not be an issue( provided that you have the time to do it of course!).
You won’t get a 3 asset variance question. Never
@ yohji, I’ve registered for Dec exam so no past experience with the questions. but the way i learnt portfolio variance is not based on the formula. try to learn the logic of the formula and how to apply it to the matrix. then as Rehix said, it doesnt matter how many assets are included. Note that in the matrix, all numbers on the diagonal are variances and the rest are Covariances that are mirrored in the matrix. so the way you do it is, 1- Diagonal: sum of (asset weights to the power of 2 times the variance) 2- Triangle (Area above or below Diagonal): sum of (asset 1 weight times asset 2 weight times their Covariance) and since the triangle is mirrored you gotta multiply the result by 2 3- Add 1 and 2 above Hope it makes sense.
come back to it in one week and it will make more sense. spend an hour or so on it. come back in one week… repeat until it seems like a simple concept and the equation that makes sense.