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

= 3.00% + 1.05 +

= 1.20% + 1.20 +

and M = 29%; R-squaredA = 0.29; R-squaredB = 0.14

Assume you create portfolio P with investment proportions of 0.60 in A and 0.40 in B.

1. What is the standard deviation of the portfolio? [Hint: R-squared is the variance explained by the market risk ²² divided by the variance in the stock ².]
2. What is the beta of the portfolio?
3. What is the firm-specific variance of the portfolio? (Round to 3 decimals.)
4. What is the covariance between the portfolio and the market index? (Round to 3 decimals.)