Problem: On the basis of a two-factor model, consider two securities with the following characteristics:
Characteristic Security A Security B
Factor 1 sensitivity 1.5 .7
Factor 2 sensitivity 2.6 1.3
Nonfactor risk 25.0 16.0
The standard deviations of factor 1 and factor 2 are 20% and 15%, respectuvely, and the factors have a covariance of 255. What are the standard deviations of securities A and B ? what is their covariance ?