Question

Suppose that the index model for stocks A and B is estimated from excess returns with...

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

Break down the variance of each stock to the systematic and firm-specific components. (Do not round intermediate calculations. Calculate using numbers in decimal form, not percentages. Round your answers to 4 decimal places.)

Risk A Risk B
Systematic
Firm-specific

Homework Answers

Answer #1

Variance of A=Beta A^2*Standard Deviation of M^2/Ra^2 =1.4^2*24%^2/0.30 =0.37362
Variance of of B=Beta B^2*Standard Deviation of M^2/Rb^2 =1.7^2*24%^2/0.20 =0.83232

Systematic Risk of A=Beta A^2*Standard Deviation of M^2=1.40^2*24%^2=0.1129
Firm Specific risk of A =Variance of Risk A-Systematic Risk=0.37362-0.1129 =0.2634

Systematic Risk of B=Beta A^2*Standard Deviation of M^2=1.7^2*24%^2=0.1665
Firm Specific risk of B=Variance of Risk B-Systematic Risk=0.83232-0.1665 =0.6658

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose that the index model for stocks A and B is estimated from excess returns with...
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 firm-specific components. (Do not round intermediate calculations. Calculate using numbers in decimal form, not percentages. Round your answers to 4 decimal places.)
Suppose that the index model for stocks A and B is estimated from excess returns with...
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 2.0% + 0.40RM + eA RB = -1.8% + 0.9RM + eB σM = 15%; R-squareA = 0.30; R-squareB = 0.22 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.) Covariance Stock A Stock B
Suppose that the index model for stocks A and B is estimated from excess returns with...
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 places.) =
Suppose that the index model for stocks A and B is estimated from excess returns with...
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 places.) Stock A: Stock B:
Suppose that the index model for stocks A and B is estimated from excess returns with...
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 proportions of 0.50 in a risky portfolio P, 0.30 in the market index, and 0.20 in T-bill. Portfolio P is composed of 60% Stock A and 40% Stock B. a....
Suppose that the index model for stocks A and B is estimated from excess returns with...
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 2.5% + 0.95RM + eA RB = −1.8% + 1.10RM + eB σM = 27%; R-squareA = 0.23; R-squareB = 0.11 Assume you create a portfolio Q, with investment proportions of 0.50 in a risky portfolio P, 0.30 in the market index, and 0.20 in T-bill. Portfolio P is composed of 60% Stock A and 40% Stock B. What...
Suppose that the index model for stocks A and B is estimated from excess returns with...
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...
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% + 1.50RM + 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.) Covariance Stock A Stock B
Suppose that the index model for stocks A and B is estimated from excess returns with...
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 3% + 0.7RM+eA RB = -2%+1.2RM+eB R2A= 0.2   R2B = 0.12σM = 20% For portfolio P with investment proportions of 0.60 in A and 0.40 in B, a. What is the standard deviation of the portfolio? b. Break down the variance of portfolio to the systematic and firm-specific components. c. What is the covariance between portfolio and the market...
Suppose that the index model for stocks A and B is estimated from excess returns with...
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 3% + 0.7RM+eA RB = -2%+1.2RM+eB R2A= 0.2 R2B = 0.12σM = 20% For portfolio P with investment proportions of 0.60 in A and 0.40 in B, a. What is the standard deviation of each stock? b. Break down the variance of each stock to the systematic and firm-specific components. c. What is the covariance between each stock and...