Suppose that the index model for two Canadian stocks HD and ML is estimated with the following results:

R_HD =0.02+0.80R_M+e_HD

R-squared =0.6

R_ML =-0.03+1.50R_M+e_ML

R-squared =0.4

_M =0.20

where M is S&P/TSX Comp Index and R_X is the excess return of stock X.

1.What is the standard deviation of each stock? (Hint: b_i = (_{iM i}) / _M.)

2.What is the systematic risk of each stock?

3.What are the covariance and correlation coefficient between HD and ML?

4.For portfolio P with investment proportion of 0.3 in HD and 0.7 in ML, calculate the systematic risk, non-systematic risk and total risk of P.