Question
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: R A = 3.8% + 1.25
Suppose that the index model for stocks A and B is estimated from excess returns with the following results:
| RA = 3.8% + 1.25RM + eA | |
| RB = 1.8% + 1.60RM + eB | |
| M = 18%; R-squareA = 0.24; R-squareB = 0.18 |
| Assume you create a portfolio Q, with investment proportions of 0.50 in a risky portfolio P, 0.30 in the market index, and 0.20 in T-bill. Portfolio P is composed of 60% Stock A and 40% Stock B. |
| 1. | What is the standard deviation of portfolio Q? (Calculate using numbers in decimal form, not percentages. Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) |
| Standard deviation | % |
| 2. | What is the beta of portfolio Q? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Portfolio beta |
| 3. | What is the "firm-specific" risk of portfolio Q?(Calculate using numbers in decimal form, not percentages. Do not round intermediate calculations. Round your answer to 4 decimal places.) |
| Firm-specific |
| 4. | What is the covariance between the portfolio and the market index? (Calculate using numbers in decimal form, not percentages. Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Covariance |
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Handbook Of The Economics Of Finance Corporate Finance Volume 1A
Authors: George M. Constantinides, M. Harris, Rene M. Stulz
1st Edition
0444513620, 978-0444513625
