
Explanation:
We first determine the risk budget which is given as:
ασW = 2.33 × 0.158 × $325
= $119.6455 million each.
Therefore, the total risk budget is given as:
√($119.6455² + $119.6455² + 2 × 0.81 × $119.6455 × $119.6455) = $227.641 million
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Q.3029 PERP has allocated $650 million in U.S. stocks to two active managers who are equally good, with each manager receiving the same amount of $325 million. The managers created two distinct portfolios but both have a volatility of 15.8% and a correlation of 0.81 with each other. Compute the total risk budget, assuming that α = 2.33.
A
$261.947
B
$307.148
C
$227.641
D
$321.049
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