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 index