Cap Market Oreilly

Was a question on to calculate covariance between 2 markets. Completely had a brain fart on how to do this and where the formula is from?

M12 = (1.20 × 0.90 × 0.0225) + (0 × 0 × 0.0025) + [(1.20 × 0) + (0 × 0.90)] × 0.0022 = 0.0243.

Exhibit 1: Factor Covariance Matrix

Global Equity

Global Bonds

Global equity

0.0225

0.0022

Global bonds

0.0022

0.0025

Exhibit 2: Market Factor Sensitivities and Residual Risk

Sensitivities

Global Equity

Global Bonds

Residual Risk

Market 1

1.2

0

12.00%

Market 2

0.9

0

7.00%

Market 3

0

0.95

1.80%

Can anyone point it to me as to where I can reference this in the material/explain it.

Economics I think…

Economic analysis and asset allocation - Rdg 15 vol 3 Los © formal tools for capital market expectation