Please explain how to get part B. I am struggling! Thank you for your help!

2. Assume that security returns are generated by the single index model R = 0; + ARM+& where R; is the excess return for security i and Ry is the market's excess return. Suppose also that there are three securities A, B, and C characterized by the following data: Beta Security A B 0.8 Expected Return 0.10 0.12 0.14 o'(x) 0.05 0.01 0.10 1.0 1.2 A.) (5 points) If on=0.04 calculate the variance (e.g. the total risk) of returns of securities A, B, and C. Unsystematic Risk = o(&) Systematic Risk = 0%x* B2 A=0.04 * (0.8)2 = 0.025 B=0.04 * (1.0)2 = 0.04 C =0.04 * (1.2)2 = 0.0576 Total Risk = Unsystematic + Systematic A=0.05 +0.025 = 0.0765 B = 0.01 +0.04 = 0.05 C=0.10+ 0.0576 = 0.1576 B.) (5 points) Now assume there are an infinite number of assets with the return characteristics identical to those of A, B, and C, respectively. If one forms a well-diversified portfolio of type A securities, what will be the variance of the portfolio's return? Similarly, what will the variance of the portfolio's return for portfolios formed only from type B? type C? |