3. (1 point) You use the monthly returns of a mutual fund and ordinary least squares (OLS) to estimate the parameters of the single-factor model rp,t rf,t = a + b(rm,t rf,t) + p,t, where rp is the monthly return of the mutual fund in month t. Your estimates are a=0.005 and B = 1.2. You also estimate that the variance of the regression residual is var(p,t)=0.022, and that the standard deviation of monthly returns on the market index is om=0.05. (a) (1/2 point) Given these parameter estimates, are the expected returns of the mutual fund described by the CAPM? (In answering this question, treat the point estimates a=0.005, B= 1.2, and var(ep) =0.022 as the true values of the parameters.) (b) (1/2 point) What is the standard deviation of the monthly returns of the mutual fund? Hint: Use the fact that, if two random variables X and Y are uncorrelated, then var(bX + Y)= bvar(x) + var(Y). 3. (1 point) You use the monthly returns of a mutual fund and ordinary least squares (OLS) to estimate the parameters of the single-factor model rp,t rf,t = a + b(rm,t rf,t) + p,t, where rp is the monthly return of the mutual fund in month t. Your estimates are a=0.005 and B = 1.2. You also estimate that the variance of the regression residual is var(p,t)=0.022, and that the standard deviation of monthly returns on the market index is om=0.05. (a) (1/2 point) Given these parameter estimates, are the expected returns of the mutual fund described by the CAPM? (In answering this question, treat the point estimates a=0.005, B= 1.2, and var(ep) =0.022 as the true values of the parameters.) (b) (1/2 point) What is the standard deviation of the monthly returns of the mutual fund? Hint: Use the fact that, if two random variables X and Y are uncorrelated, then var(bX + Y)= bvar(x) + var(Y)