Question
Suppose the index model for stocks 1 and 2 is estimated from the excess returns with the following results: r 1 = 2% + 0
Suppose the index model for stocks 1 and 2 is estimated from the excess returns with the following results: r1 = 2% + 0.6RM + e1, r2 = 2% + 1.2RM + e2, M = 25%, and the regression R2 of stocks 1 and 2 is 0.25 and 0.20, respectively. Answer the following questions.
(a) What is the variance of each stock?
(b) What is the fifirm-specifific risk of each stock?
(c) What is the covariance between the two stocks?
(d) What is the covariance between each stock and the market index?
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Matlab An Introduction with Applications
Authors: Amos Gilat
5th edition
1118629868, 978-1118801802, 1118801806, 978-1118629864
