AM mock - Capital market expectation

[BldSwtTrs]

In the corection of the third question of the item set, they say Residual risk variance is 0.044, and in the Exhibit under residual risk it’s written 4.4%
How do we know that the number of 4.4% is a variance and not a standard deviation? Usually percentage number are standard deviation and not variance. It seems weird to me.

 

[Blackou]

I had the same issue… and made the same mistake as you probably did
Residual risk is described as the variance: ( see §3.1.1.4 Multifactor models in Reading 15 : Capital Market expectations)
“every market has some risk that is not explained by the factors. This is called the market’s idiosyncratic or residual risk and is represented by the residual variance, Var(εi) for market i. It is assumed that the residuals are uncorrelated”
It is counter-intuitive since for example ”tracking risk” in reading 23 (Equity Portfolio management) is a standard deviation …

 

[MrSmart]

It was a regression output.

 

[olivia_x]

BldSwtTrs wrote:
In the corection of the third question of the item set, they say Residual risk variance is 0.044, and in the Exhibit under residual risk it’s written 4.4%
How do we know that the number of 4.4% is a variance and not a standard deviation? Usually percentage number are standard deviation and not variance. It seems weird to me.

I think residual risk always is in variance format because in the regression formula it is without square if you recall the formula,
and hmm guess a cheeky way to guess/be sure/check whether it is standard dev or variance is that…standard dev is always much higher (say 0.40) while variances are looking normal (0.16, 16%). I doubt there would be a case we would see a stdev>40% in exam..)