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Portfolio - Two factor model

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Dode Cicero owns a portfolio of two securities. On the basis of a two-factor model, the two securities have the following characteristics:

Security Zero 1 Factor 1 Factor 2 Nonfactor Risk Proportion
Factor Sensitivity Sensitivity
A 2% .30 2.0 196 .70
B 3 .50 1.8 100 .30

The factors are uncorrelated. Factor 1 has a expected value of 15% and a standard deviation %20. Factor 2 has an expected value of 4 % and a standard deviation of 5 %. Calculate the expected return and standard deviation of Dode's portfolio.

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The solution calculates expected return and standard deviation of a portfolio using two factor model.

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Dode Cicero owns a portfolio of two securities. On the basis of a two-factor model, the two securities have the following characteristics:

Security Zero 1 Factor 1 Factor 2 Nonfactor Risk Proportion
Factor Sensitivity Sensitivity
A 2% .30 2.0 196 .70
B 3 .50 1.8 100 .30

The ...

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