Example ƒ 85

Consider a portfolio of stock A and B, where the weight of stock A is 0,4 and assume the following:

ƒ

What are the beta values for stock A and B?

ƒ

What is the covariance between stock A and B, assuming a SFM model?

ƒ

What is the true covariance between stock A and B?

ƒ

What is the beta for the portfolio?

ƒ

What is the variance of the portfolio, assuming a SFM model?

ƒ

What is the true variance of the portfolio?

Single-period random cash flows: Factor models - SFM

.

(^2) ,
0
; 1
,
0
;
(^5) ,
0
;
0
; 1
,
0
;
(^5) ,
0
,
,
,

=

=

=
B
A
M B M A M B A
σ
σ
ρ
ρ
σ
ρ