Question
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: R A = 2.50% + 0.95
Suppose that the index model for stocks A and B is estimated from excess returns with the following results:
RA = 2.50% + 0.95RM + eA
RB = -1.80% + 1.10RM + eB
M = 27%; R-squareA = 0.23; R-squareB = 0.11
Assume you create a portfolio Q, with investment proportions of 0.50 in a risky portfolio P, 0.30 in the market index, and 0.20 in T-bill. Portfolio P is composed of 60% Stock A and 40% Stock B.
1) What is the standard deviation of portfolio Q?
2) What is the beta of portfolio Q?
3) What is the "firm-specific" risk of portfolio Q?
4) What is the covariance between the portfolio and the market index?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started