On the basis of a one factor model, consider a portfolio of two securities with the following characteristics:
Security Factor Sensitivity Nonfactor risk proportion
A .20 49 .40
B 3.50 100 .60
Question 1: If the standard deviation of the factor is 15%, what is the factor risk of the portfolio?
Question 2: What is the nonfactor risk of the portfolio?
Question 3: What is the portfolio's standand deviation?