1) Under the assumption that the risk free-rate is constant at 6% for one year from now, calculate the Sharpe ratio for a portfolio of shares where the risk premium of the portfolio over the one year future period is estimated at 14% and the monthly variance of the portfolio excess return is 5%.

2) The index model has been estimated for stocks A and B with the following results:

RA = 0.06 + 0.5RM + eA.

RB = 0.12 + 0.39RM + eB.

M = 0.25; (eA) = 0.16; (eB) = 0.20.

a) What is the covariance between the returns on stocks A and B? [10 marks]

b) Without performing any calculation, determine which of the two stocks has higher systematic risk? Explain your answer. [10 marks]

c) Compute the two components (firm-specific and systematic) of the total risk for each of stock A and B? [25 marks]

d Assuming that the risk-free rate is constant at 3%, calculate the new intercept for the non-modified version (in terms of total returns r instead of excess returns R ) of the SIM model for stock A.