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

R_A = 0.038 + 0.74R_M + e, R-squared = 0.16.

R_B = -0.016 + 0.96R_M + e, R-squared = 0.16.

a) Assume that the market has a standard deviation of 24%. What is the standard deviation of each stock?

b) Break down the variance of each stock to the systematic and firm-specific components for the two stocks?

c) What are the covariance and correlation coefficient between the two stocks?

d) What is the covariance between each stock and the market index?

e) Assume you create portfolio P with investment proportions of 0.60 in Stock A and 0.40 in Stock B. The portfolio P standard deviation is?

f) Assume you create portfolio Q with investment proportions of 0.50 in P, 0.30 in the market index and 0.20 in T-bills. portfolio P is composed of 60% Stock A and 40% Stock B. Calculate portfolio Q's standard deviation, beta, firm-specific variance and the covariance between portfolio Q and the market index?