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

R_A = 3% + 0.7R_M + e_A

R_B = 2% + 1.2R_M + e_B

_M = 20%; R-square_A = 0.20; R-square_B = 0.12

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

a. What is the standard deviation of the portfolio?

b. What is the beta of your portfolio?

c. What is the firm-specific variance of your portfolio?

d. What is the covariance between the portfolio and the market index?