10/17
Dode Cicero owns a portfolio of two securities. On the basis of a
two-factor model, the two securities have the following characteristics:
Security Zero 1 Factor 1 Factor 2 Nonfactor
Risk Proportion
Factor Sensitivity Sensitivity
A 2% .30 2.0
196 .70
B 3 .50 1.8
100 .30
The factors are uncorrelated. Factor 1 has a expected value of 15% and a
standard deviation %20. Factor 2 has an expected value of 4 % and a
standard deviation of 5 %. Calculate the expected return and standard
deviation of Dode’s portfolio.
Business Homework Solutions
#6992
Portfolio problem - Expected return and standard deviation of a portfolio using two factor model
Dode Cicero owns a portfolio of two securities. On the basis of a two-factor model, the two securities have the following characteristics:
Security Zero 1 Factor 1 Factor 2 Nonfactor Risk Proportion
Factor Sensitivity Sensitivity
A 2% .30 2.0 196 .70
B 3 .50 1.8 100 .30
The factors are uncorrelated. Factor 1 has a expected value of 15% and a standard deviation %20. Factor 2 has an expected value of 4 % and a standard deviation of 5 %. Calculate the expected return and standard deviation of Dode's portfolio.
The solution calculates expected return and standard deviation of a portfolio using two factor model.
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