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!

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Expert Solution

jeff jeffy answered 1 year ago

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