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

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?

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