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?