Question

In: Finance

What is the covariance between each stock and the market index? Suppose that the index model...

What is the covariance between each stock and the market index?

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% + 1.2RM + eB

σM = 29%; R-squareA = 0.29; R-squareB = 0.14

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 ?

Solutions

Expert Solution

STOCK A : 0.088

STOCK B : 0.101


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