In: Finance
Suppose that the index model for stocks A and B is estimated
from excess returns with the following results:
RA = 2.50% + 0.60RM +
eA
RB = -1.50% + 0.70RM +
eB
σM = 19%;
R-squareA = 0.24;
R-squareB = 0.18
Assume you create portfolio P with investment proportions
of 0.70 in A and 0.30 in B.
a. What is the standard deviation of the
portfolio? (Do not round your intermediate
calculations. Round your answer to 2 decimal
places.)
b. What is the beta of your portfolio? (Do
not round your intermediate calculations. Round
your answer to 2 decimal places.)
c. What is the firm-specific variance of your
portfolio? (Do not round your intermediate
calculations. Round your answer to 4 decimal
places.)
d. What is the covariance between the portfolio
and the market index? (Do not round your intermediate
calculations. Round your answer to 3 decimal
places.)