The regression model of an asset A and B against the market return, under single-index pricing model, is as follow: RA=+RM+eARB=0.05+1.5RM+eB The risk-free rate is 3%. E(RM)=10%,M=25%andeA=30%,eB=80% Assume the only source of covariance between A and B is their common dependence on the market return. If we only have two data points, the best estimate of and can be directly solved by simultaneous equations. 1. ( 2 points) The following are the data points (in \%) we have: Find the respective and ^. They are the estimates of and in the regression model. 2. (1 point) Find RA if RM is 8%. 3. (2 points) What is E(RA) and RA ? 4. (3 points) Find Cov(RM,RA). Hence find Corr(RM,RA). The regression model of an asset A and B against the market return, under single-index pricing model, is as follow: RA=+RM+eARB=0.05+1.5RM+eB The risk-free rate is 3%. E(RM)=10%,M=25%andeA=30%,eB=80% Assume the only source of covariance between A and B is their common dependence on the market return. If we only have two data points, the best estimate of and can be directly solved by simultaneous equations. 1. ( 2 points) The following are the data points (in \%) we have: Find the respective and ^. They are the estimates of and in the regression model. 2. (1 point) Find RA if RM is 8%. 3. (2 points) What is E(RA) and RA ? 4. (3 points) Find Cov(RM,RA). Hence find Corr(RM,RA)