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

R_A = 0.02 + 0.40(R_M) + e_A

R_B = -0.018 + 0.90(R_M) + e_B

_M = 0.15 ; R-square_A = 0.30 ; R-square_B = 0.22

Assume you create a portfolio P with investment proportions of 0.70 in A, and 0.30 in B.

Given the above information, we know: _A = 0.40, _B = 0.90

a) What is the Standard Deviation, Beta, and Firm-specific Variance of this portfolio?

b) What is the Covariance between this portfolio and the market index?

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