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Suppose that the index model for stocks A and B is estimated from excess returns with the following results: R A = 3.5% + 0.65

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

R_A = 3.5% + 0.65R_M + e_A

R_B = -1.6% + 0.8R_M + e_B

_M = 21%; R-square_A = 0.22; R-square_B = 0.14

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

What is the standard deviation of the portfolio?

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