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

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 .

i. What is the standard deviation of the portfolio? ii. What is the beta of your portfolio? iii. What is the firm-specific variance of your portfolio? iv. What is the covariance between the portfolio and the market index?

RA = 3% +0.7RM tea Rp =- 2% +1.2RM -2+ eB OM = 20%; R-square= 0.20; R-squarep = 0.12 RA = 3% +0.7RM tea Rp =- 2% +1.2RM -2+ eB OM = 20%; R-square= 0.20; R-squarep = 0.12