The data below describe a three-stock financial market that satisfies the single-index model.

The standard deviation of the market index portfolio is 25%.

a. What is the mean excess return of the index portfolio?

b. What is the covariance between stock A and stock B?

c. What is the covariance between stock B and the index?

d. Break down the variance of stock B into its systematic and firm-specific components.

Transcribed Image Text:

Mean Excess Standard Stock Capitalization Beta Return Deviation ABC $3,000 1.0 10% 40% $1,940 $1,360 22 0.2 2 30 1.7 17 50