Question: Consider a market that is governed by a factor structure with two factors. There are two widely diversified portfolios L and M. Factor loadings are

Consider a market that is governed by a factor structure with two factors. There are two widely diversified portfolios L and M. Factor loadings are b L1 = 4, b L2 = 1, b M1 = 2, b M2 = 3. The two factors have standard deviations σ 1 = 2%, σ 2 = 8%. The correlation between the factors is 0.25.

What is the correlation Corr[r L , r M ] between the two assets?

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