I have seen some differences in how the volatility of a portfolio is calculated from the individual volatilities. My understanding is the formula is: vol XY = (proportion X^2 *vol Y^2 + proportion Y^2*volY^2 + 2*volX*volX*corXY*propX*propY)^0.5 However in ST5 September 2017 Q 6 iii they seem to use absolute values rather than proportions. So instead of it being (7/11)^2 and (4/11)^2 they've used 0.7^2 and 0.4^2. I can see that depending on the proportions using one formula or the other could give a significantly different answer. Which formula is correct, or would either be accepted?
Both are correct. If you use proportions, you end up with a percentage volatility. You have to then apply this percentage to the fund value to get the loss in absolute terms. If you use absolute amounts, the formula will give you the absolute loss. But then you may have to work it out as a percentage.
