Company uses the single-index model to estimate beta for stocks A and B. The risk-free rate over the period was 2%, and the markets average return was 10%. Performance is measured using an index model regression on excess returns.

Stock A:

Index model regression estimates 1% + 0.8(rM -rf)

Residual standard deviation, 25%

Stock B:

Index model regression estimates -2% + 1.2(rM + rf)

Residual standard deviation:40%

The standard deviation of market returns 22%

Compute the nonsystematic risk (variance) of a portfolio with 40% in stock A, 40% in stock B, and 20% in the risk-free asset.