Question

Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 3.0% + 1.05RM + eA RB = –1.2% + 1.20RM + eB σM = 29%; R-squareA = 0.29; R-squareB = 0.14 What are the covariance and correlation coefficient between the two stocks? (Do not round intermediate calculations. Calculate using numbers in decimal form, not percentages. Round your answers to 4 decimal places.)

Answer #1

Standard Deviation of A =31.9725%^0.5 =56.5422%

Standard Deviation of B^2=Beta B^2*Standard Deviation of M^2/Ry^2
=1.20^2*29%^2/0.14 =86.5029%

Standard Deviation=86.5029%^0.5 =93.0069%

Covariance =Beta of A*Beta of B*Standard Deviation of
M^2=1.05*1.20*29%^2 **=10.5966%**

Correlation=Covariance/(Standard Deviation of A*Standard Deviation
of B) =10.5966%/(56.5422%*93.0069%) =0.2015

Suppose that the index model for stocks A and
B is estimated from excess returns with the following
results:
RA = 4.0% + 0.50RM +
eA
RB = –1.2% + 0.70RM +
eB
σM = 17%;
R-squareA = 0.26;
R-squareB = 0.18
What are the covariance and correlation coefficient between the
two stocks? (Do not round intermediate calculations.
Calculate using numbers in decimal form, not percentages. Round
your answers to 4 decimal places.)
Covariance:
Correlation coefficient:

Suppose that the index model for stocks A and
B is estimated from excess returns with the following
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RA = 2.0% + 0.40RM +
eA
RB = -1.8% + 0.9RM +
eB
σM = 15%;
R-squareA = 0.30;
R-squareB = 0.22
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(Calculate using numbers in decimal form,
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RA = 3.6% + 1.20RM +
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RB = -1.6% + 1.50RM +
eB
σM = 16%;
R-squareA = 0.25;
R-squareB = 0.15
What is the covariance between each stock and the market index?
(Calculate using numbers in decimal form,
not percentages. Do not round your intermediate
calculations. Round your answers to 3 decimal places.)
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Suppose that the index model for stocks A and B is estimated
from excess returns with the following results:
RA = 3.6% + 1.20RM + eA RB = –1.6% + 1.5RM + eB σM = 16%;
R-squareA = 0.25; R-squareB = 0.15
Break down the variance of each stock to the systematic and
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Calculate using numbers in decimal form, not percentages. Round
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Suppose that the index model for stocks A and
B is estimated from excess returns with the following
results:
RA = 4.5% + 1.40RM +
eA
RB = –2.2% + 1.7RM +
eB
σM = 24%;
R-squareA = 0.30;
R-squareB = 0.20
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firm-specific components. (Do not round intermediate
calculations. Calculate using numbers in decimal
form, not percentages. Round your answers to 4
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Suppose that the index model for stocks A and
B is estimated from excess returns with the following
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RA = 5.0% + 1.30RM +
eA
RB = –2.0% + 1.6RM +
eB
σM = 20%;
R-squareA = 0.20;
R-squareB = 0.12
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intermediate calculations. Round your answers to 2 decimal
places.)
=

Suppose that the index model for stocks A and B is estimated
from excess returns with the following results:
RA = 5.0% + 1.30RM + eA
RB = –2.0% + 1.6RM + eB
σM = 20%; R-squareA = 0.20; R-squareB = 0.12
What is the standard deviation of each stock? (Do not round
intermediate calculations. Round your answers to 2 decimal
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Stock A:
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Suppose that the index model for stocks A and B is estimated
from excess returns with the following results:
RA = 4.5% + 1.40RM +
eA
RB = –2.2% + 1.70RM +
eB
σM = 24%;
R-squareA = 0.30;
R-squareB = 0.20
Assume you create a portfolio Q, with investment
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σM = 0.290 σ(eA) = 0.20 σ(eB) = 0.10 What is the correlation
coefficient between the two stocks? (Round your answer to 4 decimal
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