Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Finance 6. Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 3% +0.7RM
Finance
6. Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 3% +0.7RM +eA RB = -2% + 1.2RM +eB OM = 20%; R-square a = 0.20; R-squarep = 0.12 a) What is the standard deviation of each stock? b) Break down the variance of each stock to the systematic and firm-specific components. c) What are the covariance and correlation coefficient between the two stocks? d) What is the covariance between each stock and the market ir e) Assume you create portfolio P with investment proportions of 0.60 in A and 0.40 in B. i. What is the standard deviation of the portfolio? ii. What is the beta of your portfolio? iii. What is the firm-specific variance of your portfolio? iv. What is the covariance between the portfolio and the market indexStep by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started