Question

In: Statistics and Probability

Suppose that the index model for two Canadian stocks HD and ML is estimated with the...

Suppose that the index model for two Canadian stocks HD and ML is estimated with the following results:

RHD =0.02+0.80RM+eHD

R-squared =0.6

                  RML =-0.03+1.50RM+eML

R-squared =0.4

σM =0.20

where M is S&P/TSX Comp Index and RX is the excess return of stock X.

  1. What is the standard deviation of each stock? (Hint: bi = (ρiM σi) / σM.)
  2. What is the systematic risk of each stock?
  3. What are the covariance and correlation coefficient between HD and ML?
  4. For portfolio P with investment proportion of 0.3 in HD and 0.7 in ML, calculate the systematic risk, non-systematic risk and total risk of P.

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Expert Solution

orchestra answered 1 year ago
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