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I'm unsure how to find the covariance matrix in part (b) and what the residual deviations are. Any tips on how to tackle this?

  • $\begingroup$ In a Factor Model the covariance matrix can be written V = B’FB + D Where F is the covariance matrix for factors and D is the diagonal matrix of residual (i.e. idiosyncratic) variances of the individual securities. web.stanford.edu/~wfsharpe/mia/fac/… (note that what they are giving you are the residual standard deviations, square them to get the variances) $\endgroup$ – Alex C Apr 10 at 16:32

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