For a one-factor model, an analyst finds the variance of the factor is 4, the slope for the security is 2, and the variance of the random error is 12. The variance for the security is
A) 28.
B) 24.
C) 16.
D) 12.

Question

Quizplus · Accepted Answer

The variance of the security in a one-factor model can be calculated using the formula: Variance of the security = (Slope^2 * Variance of the factor) + Variance of the random error. Plugging in the given values: (2^2 * 4) + 12 = 16 + 12 = 28.

For a One-Factor Model, an Analyst Finds the Variance of the Factor