# Question

a. Compute the average monthly return and monthly standard return deviation for each portfolio and all three risk factors. Also state these values on an annualized basis.

b. Based on the return and standard deviation calculations for the two portfolios from Part a, is it clear whether one portfolio outperformed the other over this time period?

c. Calculate the correlation coefficients between each pair of the common risk factors (i.e., 1 & 2, 1 & 3, and 2 & 3).

d. In theory, what should be the value of the correlation coefficient between the common risk factors? Explain why.

e. How close do the estimates from Part b come to satisfying this theoretical condition? What conceptual problem(s) is created by a deviation of the estimated factor correlation coefficients from their theoretical levels?

b. Based on the return and standard deviation calculations for the two portfolios from Part a, is it clear whether one portfolio outperformed the other over this time period?

c. Calculate the correlation coefficients between each pair of the common risk factors (i.e., 1 & 2, 1 & 3, and 2 & 3).

d. In theory, what should be the value of the correlation coefficient between the common risk factors? Explain why.

e. How close do the estimates from Part b come to satisfying this theoretical condition? What conceptual problem(s) is created by a deviation of the estimated factor correlation coefficients from their theoretical levels?

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