Arbitrage Pricing Model

[jeff-1984]

Hi David,

Hope all is well. In reference to the practice questions sheet of APT, I have an inquiry related to question 63.3. Can you please explain to me which formula we're using and why ?

 

[David Harper CFA FRM]

Hi Jeffers,

Can you look at this GARP 2011 sample question: http://forum.bionicturtle.com/threa...e-pricing-theory-foundations.4104/#post-13598

We're apply a covariance property (http://en.wikipedia.org/wiki/Covariance), although instead of COV(X,Y), where (X) and (Y) are the random variables, APT gives us two random variables, each of which is a linear combination of two random variables: aX+bY and cW*dV, so we are looking for COV(aX + bY, cW*dV)
... or in this case, COV(0.8 *G + 0.1*I, 0.7*G + 0.2*I)

I hope that helps, thanks,