3. Suppose the index model for stocks A and B is estimated from the excess returns with the following results: rA = 2% + 0.7RM + eA, rB = 2% + 1.5RM + eB, M = 20%, and the regression R2 of stocks A and B is 0.30 and 0.25, respectively.

Answer the following questions.

(a) What is the variance of each stock?

(b) What is the firm-specific risk of each stock?

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

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