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1. Suppose the index model is estimated using excess returns with the following results: RA = 3% + .7RM + eA s2eA = 6% s2M

1. Suppose the index model is estimated using excess returns with the following results:

RA = 3% + .7RM + eA s2eA = 6% s2M = 16% RB = -2.0% + 1.2RM + eB s2eB = 9%

(a) For each stock, calculate the total variance and the systematic variance.

(b) What is the covariance between each stock and the market index? What is the correlation between each stock and the market index?

(c) What is the covariance and correlation between the two stocks?

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