Explanation:
The correct answer is C.
We first determine the risk budget for each manager, which is given as:
\text{Risk Budget} = 2.33 \times 0.158 \times \`$325` \text{ million} = \`$119.64`55 \text{ million each.}
Therefore, the total risk budget considering the correlation between the two portfolios is calculated as:
\text{Total Risk Budget} = \sqrt{(\`$119.64`55)^2 + (\`$119.64`55)^2 + 2 \times 0.81 \times \`$119.64`55 \times \`$119.64`55} = \`$227.64`1 \text{ 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 .
A
$261.947
B
$307.148
C
$227.641
D
$321.049
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