Question

Use the following information for the next six questions. The
index model for stock A has been estimated with the following
result: r_{A} - r_{f} = -0.02 + 1.2 (r_{M}
- r_{f}) + e_{A}. If σ_{M} = 0.2 and
R^{2}_{A} = 0.64:

a) what is the stock's alpha?

b) What is the stock's beta?

c) What is the stock's standard deviation?

d) What is the stock's systematic risk?

e) What is the stock's firm-specific risk?

Answer #1

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...

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 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...

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.)

The index model has been estimated for stocks A and B with the
following results: RA = 0.12 +0.630RM + eA RB = 0.04 + 1.448RM + eB
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
places.)

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 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.)

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
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 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:

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