• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Value at risk for a portfolio (2017 Sep Q6)

M

mw97

Keen member
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.
 
You must log in or register to reply here.
Back
Top