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Assessing portfolio risk

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On the basis of a one factor model, consider a portfolio of two securities with the following characteristics :

Security Factor Sensitivity Nonfactor risk proportion
A .20 49 .40
B 3.50 100 .60

A) If the standard deviation of the factor is 15% , what is the factor risk of the portfolio ?

B) What is the nonfactor risk of the portfolio ?

C) What is the portfolio's standand deviation ?

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Solution Summary

This a three-part problem which calculates the factor risk, the nonfactor risk and the standand deviation of a portfolio of two securities.

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<br>In a one-factor model, a portfolio's factor risk is expressed as bp^2&#963;F^2. Since the sensitivity of the ...

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