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1. The single index model has been used to estimate the Security Characteristic Lines (SCL) for stocks A and B with the following results: RA
1. The single index model has been used to estimate the Security Characteristic Lines (SCL) for stocks A and B with the following results: RA 0.03 + 0.7RM + e, R-squared for stock A-32% RB =-0.02 + 1.2RM + en; R-squared for stock B-75% Market return standard deviation of 13% where RA is the excess return on Stock A; RB is the excess return on Stock B; RM Is the market excess return; eA Is the residual on Stock A; es is the residual on Stock B. (a) Calculate the standard deviations for stock A and stock B. (b) Break down the total variance of Stock A to the systematic variance and unsystematic variance. (c) Calc ulate the covariance and correlation between stock A and stock B
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