SFM variance vs. Markowitz variance 82Markowitz formula is perfectly accurate, given the accuracy of the covariance estimates.(The Markowitzmodel makes no assumptions regarding the process generating security returns.)
The SFM assumes the residuals are uncorrelated across different companiesÄSFM variance is only anapproximation of the true variance, it is only asaccurate as our assumption regarding the residuals!
Single-period random cash flows: Factor models - SFM