Question
In: Finance
The index model has been used to estimate returns on stocks A and B. The results...
The index model has been used to estimate returns on stocks A and B. The results come
as follows:
RA = 0.02 + 0.4RM + eA
RB = 0.02 - 0.1RM + eB
, with σM = 0.4, σ(eA) = 0.20, and σ(eB) = 0.30
For portfolio P with investment proportions of 0.8 in A and the rest in B:
A) What’s the standard deviation of P?
B) What percentage of P’s total risk is systematic?
C) What’s the covariance and correlation between P and the market index?
Please show all the detail, thanks!
Solutions
jeff jeffy answered 1 year agoRelated Solutions
The index model has been estimated for the returns of stocks A and B, denoted by...
The index model has been estimated for the returns of stocks A
and B, denoted by R_A and R_B, on the return on the market denoted
by R_M, with the following results:
R_A = 0.01 + 0.8R_M + e_A.
R_B = 0.02 + 1.2R_M + e_B.
The standard deviation of market returns is 0.2; the idiosyncratic
risk (standard deviation of e_A) of stock A is 0.10; and that for
stock B is 0.20.
The standard deviation for stock A is
3. The index model has been estimated for stocks A and B with the following results:...
3. The index model has been estimated for stocks A and B with
the following results: R(A) = 0.01 + 1.4Rm R(B) = 0.03 + 1.1Rm
Additionally, the standard deviation of the market index is 21%.
What is the covariance between stocks A and B?
3a. You now have $9101. At what annual interest rate would you
have to invest this money so you can double it in 8 years? Assume
annual compounding.
3b. A firm is considering the purchase...
Suppose that the Index Model for the excess returns of stocks A and B is estimated...
Suppose that the Index Model for the excess returns of stocks A
and B is estimated with the following results: RA = 0.01 + 0.80 *
Rm + eA RB = -0.02 + 1.5 * Rm + eB Stdev(Rm)=0.25 Stdev(eA)=0.40
Stdev(eB)=0.20 What is the Standard Deviation of each Stock. What
is the Covariance between Stock A and Stock B. What is the
Correlation between Stock A and Stock B
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 = 5.0% + 1.30RM + eA
RB = –2.0% + 1.6RM + eB
σM = 20%; R-squareA = 0.20; R-squareB = 0.12
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.)
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 = 2.6% + 0.90RM +
eA
RB = –2.0% + 1.20RM +
eB
σM = 26%;
R-squareA = 0.21;
R-squareB = 0.12
Assume you create a portfolio Q, with investment
proportions of 0.40 in a risky portfolio P, 0.35 in the
market index, and 0.25 in T-bill. Portfolio P is composed
of 70% Stock A and 30% Stock B.
a....
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 = 1.60% + 0.70RM +
eA
RB = -1.80% + 0.90RM +
eB
σM = 22%;
R-squareA = 0.20;
R-squareB = 0.15
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.)...
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 = 3.60% + 1.20RM +
eA
RB = -1.60% + 1.50RM +
eB
σM = 16%;
R-squareA = 0.25;
R-squareB = 0.15
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.)...
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 = 2.20% + 0.80RM +
eA
RB = -2.20% + 1.20RM +
eB
σM = 24%;
R-squareA = 0.16;
R-squareB = 0.12
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.)...
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 = 2.50% + 0.95RM + eA RB = -1.80% + 1.10RM + eB σM = 27%;
R-squareA = 0.23; R-squareB = 0.11
Assume you create portfolio P with investment proportions of
0.60 in A and 0.40 in B.
a. What is the standard deviation of the portfolio? (Do not
round your intermediate calculations. Round your answer to 2
decimal places.)...
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 = 5.00% + 1.30RM + eA RB = -2.00% + 1.60RM + eB σM = 20%;
R-squareA = 0.20; R-squareB = 0.12
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?
b. What is the beta of your portfolio?
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