I have the solution to the exercise, but could you please explain the steps made in the solution, since I don't understand how the answer is arrived.

Question 1 Consider the following two-factor model for the returns of three stocks. Assume that the factors and epsilons have means of zero. Also, assume the factors have variance of 0.01 and are uncorrelated with each other. + FA = 0.13+ 6F1 +4F2 + A B = 0.15 + 21 + 272 +b rc = 0.07 +51 - 12 + c (a) if var(@A) = 0.01, var(@B) = 0.04, and var(@c) = 0.02, what are the correlations between them? (b) What are the expected returns of the three stocks? = Solution a.) o^ = 6-var(1) + 4var(a + var(@A) = 36 x 0.01 +16 x 0.01 +0.01 = 0.53 = 0 A,B = cov(6 +42 +A, 2i) + 22 +b = 0 A,B = cov(61,271) + cov(472, 272) A,B = 12var(F1) + Svar(F2) = 12 x 0.01 +8 x 0.01 = 0.20 o = 2var(1) + 2 var(2) + var(b) = 4 x 0.01 + 4 x 0.01 +0.04 = 0.12 = , , PAB 0.20 = 0.793 10.12 x 0.53 Question 1 Consider the following two-factor model for the returns of three stocks. Assume that the factors and epsilons have means of zero. Also, assume the factors have variance of 0.01 and are uncorrelated with each other. + FA = 0.13+ 6F1 +4F2 + A B = 0.15 + 21 + 272 +b rc = 0.07 +51 - 12 + c (a) if var(@A) = 0.01, var(@B) = 0.04, and var(@c) = 0.02, what are the correlations between them? (b) What are the expected returns of the three stocks? = Solution a.) o^ = 6-var(1) + 4var(a + var(@A) = 36 x 0.01 +16 x 0.01 +0.01 = 0.53 = 0 A,B = cov(6 +42 +A, 2i) + 22 +b = 0 A,B = cov(61,271) + cov(472, 272) A,B = 12var(F1) + Svar(F2) = 12 x 0.01 +8 x 0.01 = 0.20 o = 2var(1) + 2 var(2) + var(b) = 4 x 0.01 + 4 x 0.01 +0.04 = 0.12 = , , PAB 0.20 = 0.793 10.12 x 0.53