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

_A = 3% + 0.7 RM+ A

_B = 2% + 1.2RM + A

_A-square= 0.20 ; _B-square= 0.12, variance_M = 20% ;

For portfolio P with investment proportions of 0.60 in A and 0.40 in B,

a. What is the standard deviation of each stock?

b. Break down the variance of each stock to the systematic and firm-specific components.

c. What are the covariance and correlation coefficient between the two stocks?

d. What is the covariance between each stock and the market index?

f. For portfolio Q with investment proportions of 0.50 in P, 0.30 in the market index, and 0.20 in T-bills.

rework parts (a), (b) and (d). f. e) Rework part (e) for portfolio Q with investment proportions of 0.50 in P, 0.30 in the market index, and 0.20 in T-bills.