Mock 2 final question (don't look if you haven't done) part, question, equation, standard

pogo

I’m convinced that the answer for the last question in mock 2 was wrong.
I’m not going to reproduce the question, but it was a portfolio standard deviation calculation where they used the formula:
std dev = [(w1^2)*(sdev1^2)+ (w1^2)*(sdev2^2) + 2 * w1 * w2 * sdev1 * sdev2 * Covariance of 1 & 2] ^ 1/2
Now, I thought that if you had the covariance, you leave out the sdev1 and sdev2 in the final part of the equation?
Am I going mad?

YAhmed

No, you’re not going mad. You’re right. The formula either has product of 2, covariance and weights, or product of 2, correlation and stdv of each asset.

svgleeson

don’t worry, found a post from June which confirmed my belief that CFAI was wrong
I wasted so much time on this one, both during the mock and afterwards. Thanks CFAI!

spartanag07

So when the covariance is given…the ending part is 2*W1*W2*SD1*SD2*Cov
But when Corr is given its…2*W1*W2*Corr.
is that correct?

YAhmed

nope
when cov is given – it is 2 * w1 * w2 * cov
remember cov = cor * sd1 * sd2
when corr is given
it is 2 * w1 * w2 * corr * sd1 * sd2

Valores

makes perfect sense, it just fills in the rest of the formula for you
thanks!!!