Question: Based on a two-factor model, consider two securities with the following characteristics: The standard deviations of factors 1 and 2 are 20% and 15%, respectively,

Based on a two-factor model, consider two securities with the following characteristics:

The standard deviations of factors 1 and 2 are 20% and 15%, respectively, and the factors have a covariance of 225. What are the standard deviations of securities A and B? What is their covariance?

Characteristic Factor 1 sensitivity Factor 2 sensitivity Nonfactor risk( Security A 1.5 2.6 25.0 Security B .7 1.2 16.0

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