To find the variance between two securities using a two-factor model, an analyst does not need
A) the sensitivity of each security to each factor.
B) the year factor value.
C) the variance of Factor 1
D) the covariance (F1, F2).

Question

Quizplus · Accepted Answer

The year factor value is not relevant to finding the variance between two securities using a two-factor model. The sensitivity of each security to each factor, the variance of Factor 1, and the covariance (F1, F2) are all needed inputs for this calculation.

To Find the Variance Between Two Securities Using a Two-Factor