1. Suppose that we estimate single index models for two assets A and B and obtain the following results: RA = 0.02 + 0.65RM + eA RB = 0.04 + 1.10RM + eB In addition, we observe that M = 25.0%, A = 42.0%, and B = 50.2%.

a. Estimate the systematic and unsystematic variances of each of these assets.

b. Estimate the alpha and beta of a portfolio consisting of 60% in asset A and 40% in asset B.

c. Estimate the total, systematic and unsystematic variances of a portfolio consisting of 60% in asset A and 40% in asset B. (6 marks)