Suppose that the index model for stocks A and B is estimated from excess returns with the following results.

RA = 0.03 + 0.5RM + eA

RB = ?0.02 + 1.6RM + eB

?M = 20, V ar(eA) = 100, V ar(eB) = 201

A: What is the standard deviation of each stock?

B: What are the covariance and the correlation coefficient between the two stocks?

C: What is the covariance between each stock and the market index?

Problem 2: Suppose that the index model for stocks A and B is estimated from excess returns with the following results. RA 0.03+0.5RM eA Re =-0.02 + 1.6RM + eB ON-20, Var(ea)= 100, Var(ee)= 201 A: What is the standard deviation of each stock? B: What are the covariance and the correlation coefficient between the two stocks? C: What is the covariance between each stock and the market index