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Problem 3 (15 marks) Suppose that the index model for two Canadian stocks HD and ML is estimated with the following results: R HD =0.03+0.95R
Problem 3 (15 marks)
Suppose that the index model for two Canadian stocks HD and ML is estimated with the following results:
RHD =0.03+0.95RM+eHD
R-squared =0.55
RML =-0.06+2.10RM+eML
R-squared =0.46
M =0.22
where M is S&P/TSX Comp Index and RX is the excess return of stock X.
- What is the standard deviation of each stock? (Hint: bi = (iM i) / M.)
- What is the systematic risk of each stock?
- What is the covariance and the correlation coefficient between HD and ML?
- For portfolio P with investment proportion of 0.4 in HD and 0.6 in ML, calculate the systematic risk, non-systematic risk, and total risk of P.
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