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3.A Consider the market model as follows R p= p + b p R M + e p And R 2 as R 2= (b_(p

3.A Consider the market model as follows Rp= p + bpRM + ep

And R2 as R2= (b_(p *)^2 S_M^2)/(S_P^2)

S Denotes standard deviation; p for portfolio; M for market; and b denotes beta.

Assume beta of your portfolio is 0.88, standard deviation is 20 % and standard deviation of market is 16 % . Calculate R2.

3.B State the range in R2, and compare your calculated R2 in 3 A to the range in R2. Is your portfolio very well diversified? Why?

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