The covariance between Security D and Security E is 90. In a one-factor model, the sensitivity for D is 4; the sensitivity for E is 1.5. The variance for the factor is
A) 15%.
B) 3.9%.
C) 540%.
D) 4.9%.

Question

Quizplus · Accepted Answer

The covariance in a one-factor model is calculated as the product of the sensitivities of the two securities and the variance of the factor. Therefore, 90 = 4 * 1.5 * Variance. Solving for the variance gives 90 / (4 * 1.5) = 15.

The Covariance Between Security D and Security E Is 90