The Two-Factor Model for Security a Is -4% + 6%(IP)

question 29

Multiple Choice

The two-factor model for Security A is -4% + 6%(IP) + 2%(M) and for Security B is 1.5% + 3%(IP) + 2.5%(M) . An analyst forecasts IP at 1.5% and M at 3% with respective variances at 3% and 2%. The Covariance of Securities A and B is 80.8. Covariance (IP, M) is

• A) .1.
• B) 1.4.
• C) .8.
• D) .6.

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Definitions:

Unfavorable Direct Materials Price Variance

A financial metric indicating that the actual cost of direct materials was higher than the planned or standard cost, leading to a decrease in profitability.

Standard Price

Standard price is a pre-determined cost assigned to materials, labor, and overheads to measure variances in budgeting and accounting.

Direct Materials

Raw materials directly used in the production of goods, easily traceable to the final product.

Theoretical Standard

A benchmark for the most efficient level of operating performance or cost control, assuming perfect conditions.