5. Suppose the index model for stocks 1 and 2 has the following results

1 =0.5%+0.95 +1,2 =1.2%+1.25 +2, =25%.

The standard deviations of 1 and 2 are 20% and 22% respectively. (20 marks)

(1) Calculate the standard deviation of stock 1 and stock 2. (5 marks)

(2) What is the covariance between each stock and the market index. (5 marks)

(3) What are the covariance and correlation coefficient between these two stocks? (5 marks)

(4) Break down the variance of each stock into its systematic and firm-specific component.

(5 marks).