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please show all working (i.e. formulas and not excel) thanks Question 2 (10 marks) You estimated the single index (market) model for stocks P and
please show all working (i.e. formulas and not excel) thanks
Question 2 (10 marks) You estimated the single index (market) model for stocks P and Q with the following results: Return on Stock P: Rp = 0.04 + 0.6RM + ep Return on Stock Q: RQ = 0.04 + 1.4RM +eQ Where Rm is return on the single index and ep and eq are error terms which are not correlated with anything and have zero means. In addition, the following statistics are known for Rm and the error terms: Single index return, RM Error term for Stock P return, er Error term for Stock Q return, ed. Mean 8% 0% 0% Standard Deviation 15% 20% 10% a) Based on the single index specifications and information given, calculate the correlation coefficient between the returns of Stock P and Stock Q. (4 marks) b) An investor wants to form a portfolio of stocks P and Q. What is the minimum return standard deviation the investor can get? (6 marks) Question 2 (10 marks) You estimated the single index (market) model for stocks P and Q with the following results: Return on Stock P: Rp = 0.04 + 0.6RM + ep Return on Stock Q: RQ = 0.04 + 1.4RM +eQ Where Rm is return on the single index and ep and eq are error terms which are not correlated with anything and have zero means. In addition, the following statistics are known for Rm and the error terms: Single index return, RM Error term for Stock P return, er Error term for Stock Q return, ed. Mean 8% 0% 0% Standard Deviation 15% 20% 10% a) Based on the single index specifications and information given, calculate the correlation coefficient between the returns of Stock P and Stock Q. (4 marks) b) An investor wants to form a portfolio of stocks P and Q. What is the minimum return standard deviation the investor can get? (6 marks)Step by Step Solution
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