# Can't Quite Solve This Easy CFAI problem

The grid format throws me off here: Calculate the Covariance Between Market 1 and Market 2.

Factor Covariance Matrix:

Global Equity Global Bonds

Global Equity .0225 .0022

Global Bonds .0022 .0225

Market Factor Sensitivities and Residual Risk:

Sensitivities** Residual Risk**

Global Equity Global Bonds

Market 1 1.2 0 12.00%

Market 2 0.9 0 7.00%

Market 3 0 0.95 1.80%

Cov (Market 1, Market 2) = Beta (equity market 1) * Beta (equity market 2) * Var (equity) + Beta (bond market 1) * Beta (bond market 2) * Var (bond) + [Beta (equity market 1) * Beta (Bond Market 2) + Beta (Bond Market 1) * Beta (Equity market 2)] [Cov (bond,equity)]

Plugging in values of above formula

Cov (Market X,Market Y) = (1.2*0.9*0.0225) + (0*0*0.0225) + (1.2*0+0.9*0) (0.0022)

= 0.0243 + 0 + 0 = 0.0243

Note : In the first grid, (global equity, Global Equity) = Var (Equity); (global bond, Global bond) = Var (bond); and (global bond, global equity) = Cov (bond,equity)

Also, I highly doubt a calculation of this magnitude will come on the exam.