# Standard deviation of securities- Two factor model

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

Characteristic Security A Security B

Factor 1 sensitivity 1.5 .7

Factor 2 sensitivity 2.6 1.3

Nonfactor risk 25.0 16.0

The standard deviations of factor 1 and factor 2 are 20% and 15%, respectively, and the factors have a covariance of 255. What are the standard deviations of securities A and B ? what is their covariance ?

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#### Solution Preview

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

Characteristic Security A Security B

Factor 1 sensitivity 1.5 .7

Factor 2 sensitivity 2.6 1.3

Nonfactor risk ...

#### Solution Summary

The solution shows steps to calculate the standard deviation and covariance of securities using the two factor model.

The attached Excel file shows all the steps.