In: Finance
Suppose that the index model for stocks A and B is estimated
from excess returns with the following results:
RA = 1.8% + 0.75RM +
eA
RB = −2.0% + 1.10RM +
eB
σM = 23%;
R-squareA = 0.18;
R-squareB = 0.10
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. What is the standard deviation of portfolio
Q? (Calculate using numbers in decimal form, not
percentages. Do not round intermediate
calculations. Round your answer to 2 decimal places.)
b. What is the beta of portfolio Q?
(Do not round intermediate calculations.
Round your answer to 2 decimal places.)
c. What is the "firm-specific" risk of portfolio
Q? (Calculate using numbers in decimal form, not
percentages. Do not round intermediate
calculations. Round your answer to 4 decimal
places.)
d. What is the covariance between the portfolio
and the market index? (Calculate using numbers in decimal
form, not percentages. Do not round intermediate
calculations. Round your answer to 2 decimal
places.)
PLEASE SHOW ALL WORK. THIS IS ONE PROBLEM WITH FOUR PARTS.