Suppose two asset returns are described by a 1-factor model= 2% + 0.6f + ejr2= 2% + 0.6f+ e2where the volatility of fis 30% and the volatility of e and ez is 20%. What is the covariance of r and r2? (Nearest 0.0001)

Single-factor models, also referred to as one-factor models or single-index models, are financial…

Suppose two asset returns are described by a 1-factor model r1= 2% + 0.6f + e₂ r2 = 2% +0.6f + ez where the volatility of fis 30% and the volatility of ej and e2 is 20%. What is the covariance of r1 and r2? (Nearest 0.0001)

Suppose two asset returns are described by a 1-factor model r1= 2% + 0.6f + e₂ r2 = 2% +0.6f + ez where the volatility of fis 30% and the volatility of ej and e2 is 20%. What is the covariance of r1 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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Question

Suppose two asset returns are described by a 1-factor model
= 2% + 0.6f + ej
r2= 2% + 0.6f+ e2
where the volatility of fis 30% and the volatility of e and ez is 20%. What is the covariance of r and r2? (Nearest 0.0001)

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