You estimate the market model for stocks i and j, using monthly returns.

ri-rf=0.5%+1.13rm-rf+ei

rj-rf=1.3%+-0.7rm-rf+ej

Also m=13% (the standard deviation of the market excess return), e,i=12%, e,j=17%.

If we draw Security Characteristic Lines (SCL) of stock i and stock j, what are the intercept and slope of each SCL? (2)

What is the systematic risk of stock i and stock j respectively? (2)

What is the firm specific risk (namely unsystematic risk) of stock i and stock j respectively? (6)

What is the total risk of stock i and stock j respectively? (6)

What fraction of stock is total variance can be diversified? What fraction of stock js total variance can be diversified? (6)

What is the covariance and correlation between stocks i and j? (6)

State at least four assumptions of the CAPM model and discuss why or why not these assumptions are realistic. (8)

State what kind(s) of information is (are) can produce superior/abnormal return under each of the three form of market efficiency hypothesis AND give an example for each kind of information you mentioned. (6)