Microsoft PowerPoint - PoF.ppt

Varianceƒ 87

Total variance of the return on a security

ƒ

Portfolio variance

()

2

1

2

2

,

1

,

2

2 1

2

1

,

2 1

2

1

,

2

*

0

,

cov

*

...

J

J

P

P

N J

K

J

Fi

J

N J

J

Fi

P

F F P F F P P

x

to

due

and

i

all

for

x

where

ε

ε

ε

σ

σ

ε

ε

β

β

σ σ β σ β σ

∑

∑

=

=

=

⇒

=

=

+

+

+

=

Single-period random cash flows: Factor models - MFM

2

2 2

2

2

,

2 1

2

1

,

2

...

i

F

Fi

F

Fi

i

ε σ σ β σ β σ

+

+

+

=

⇒