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Exercise 2. Suppose that after you explain the single index model to your brother-in-law, he decides that he wants to estimate the , , and
Exercise 2. Suppose that after you explain the single index model to your brother-in-law, he decides that he wants to estimate the , , and for two stocks. The problem is that this brother-in-law has never heard of a regression and doesn't have the fuzziest idea how to run one. He collects data on the two stocks and reports to you what he does know how to compute, the mean excess return (interpret as expected return), the variance, and the correlation. You also know the mean and variance of the market excess return. Is this enough to figure out the , , and on each stock? Explain? Suppose that the reported numberfor the market and stock A and B are ERM) = 6, E[RA] = 8, E R , , and for each of the stocks? Exercise 2. Suppose that after you explain the single index model to your brother-in-law, he decides that he wants to estimate the , , and for two stocks. The problem is that this brother-in-law has never heard of a regression and doesn't have the fuzziest idea how to run one. He collects data on the two stocks and reports to you what he does know how to compute, the mean excess return (interpret as expected return), the variance, and the correlation. You also know the mean and variance of the market excess return. Is this enough to figure out the , , and on each stock? Explain? Suppose that the reported numberfor the market and stock A and B are ERM) = 6, E[RA] = 8, E R , , and for each of the stocks
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