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Suppose the index model for stocks 1 and 2 has the following results 1=0.5%+0.95+1,2=1.2%+1.25+2,=25%. The standard deviations of1and2are 20% and 22% respectively. (20 marks) (1)Calculate
- Suppose the index model for stocks 1 and 2 has the following results
- 1=0.5%+0.95+1,2=1.2%+1.25+2,=25%.
- The standard deviations of1and2are 20% and 22% respectively. (20 marks)
- (1)Calculate the standard deviation of stock 1 and stock 2. (5 marks)
- (2)What is the covariance between each stock and the market index. (5 marks)
- (3)What are the covariance and correlation coefficient between these two stocks? (5 marks)
- (4)Break down the variance of each stock into its systematic and firm-specific component.
- (5 marks).
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