Question

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

*R _{A}* = 2.5% + 0.95

Assume you create a portfolio

What is the standard deviation of portfolio

What is the "firm-specific" risk of portfolio *Q*?

What is the covariance between the portfolio and the market index?

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% + 1.70RM +
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 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 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 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 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 = 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 = 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 = 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% + 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% + 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.)

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