Questions / Quant research, Portfolio & factor risk
Risk of a difference
Returns A and B have volatilities 10% and 8%, with correlation 0.75. What is the volatility of A−B, in percentage units?
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Answer: 6.633%
- Var(A−B)=100+64−2×0.75×10×8=44. Its square root is about 6.633%.
Interview shortcut. Var(A − B) = σA² + σB² − 2ρσAσB.
In the app this has a follow-up where one thing about the setup changes. Try the follow-up.