Suppose two asset returns are described by a two factor model, n- 0% + 11 + 1.8/2 + e 12= -1% + 21 + 0.52+ 2 where the volatility of first factor is 30%, the volatility of the second factor is 10%, and the correlation between the two factors is 0.5. Suppose also that the volatilities of the error terms ej and e2 are both 10%. What is the covariance of and r2 ? (Nearest 0.0001).

Suppose two asset returns are described by a two factor model, n- 0% + 11 + 1.8/2 + e 12= -1% + 21 + 0.52+ 2 where the volatility of first factor is 30%, the volatility of the second factor is 10%, and the correlation between the two factors is 0.5. Suppose also that the volatilities of the error terms ej and e2 are both 10%. What is the covariance of and r2 ? (Nearest 0.0001).

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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