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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 = 4.00% + 0.50RM + eA

RB = -1.20% + 0.70RM + eB

σM = 17%; R-squareA = 0.26; R-squareB = 0.18

Assume you create portfolio P with investment proportions of 0.70 in A and 0.30 in B.

What is the firm-specific variance of your portfolio? (Do not round your intermediate calculations. Round your answer to 4 decimal places.)

What is the covariance between the portfolio and the market index? (Do not round your intermediate calculations. Round your answer to 3 decimal places.)

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jeff jeffy answered 1 year ago
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