Question

In: Finance

Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...

Assume that security returns are generated by the single-index model,

Ri = αi + βiRM + ei
where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 4%. Suppose also that there are three securities A, B, and C, characterized by the following data:

Security βi E(Ri) σ(ei)
A 1.3 14% 27 %
B 1.5 16% 13 %
C 1.7 18% 22 %

a. If σM = 22%, calculate the variance of returns of securities A, B, and C.

Variance
Security A
Security B
Security C

b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C?(Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number.)

Mean Variance
Security A ?%
Security B ?%

Security

C

?%

Solutions

Expert Solution


Related Solutions

Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 4%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 1.3 14% 27% B 1.5 16 13 C 1.7 18 22 a. If σM = 22%, calculate the variance of returns...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 0.7 7 % 20 % B 0.9 9 6 C 1.1 11 15 a. If σM = 16%, calculate the variance...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 1.2 12 % 25 % B 1.3 13 11 C 1.4 14 20 a. If σM = 23%, calculate the variance...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 1.3 13 % 22 % B 1.5 15 13 C 1.7 17 16 a. If σM = 20%, calculate the variance...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 1.0 10 % 23 % B 1.3 13 9 C 1.6 16 18 a. If σM = 20%, calculate the variance...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 1.4 14 % 23 % B 1.6 16 14 C 1.8 18 17 a. If σM = 22%, calculate the variance...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM +...
Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 0.8 10 % 25 % B 1.0 12 10 C 1.2 14 20 a. If σM = 20%, calculate the variance...
Problem 10-8 Assume that security returns are generated by the single-index model, Ri = αi +...
Problem 10-8 Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 1.5 6 % 29 % B 1.7 8 15 C 1.9 10 24 a. If σM = 26%, calculate...
Ri = αi + βiRM + ei where Ri is the excess return for security i...
Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 0.5 13 % 26 % B 0.9 17 12 C 1.3 21 21 a. If σM = 25%, calculate the variance of returns of securities A, B, and C. b. Now...
***Please show the math! Thank you! Assume that security returns are generated by the single-index model,...
***Please show the math! Thank you! Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 1.0 10 % 23 % B 1.3 13 9 C 1.6 16 18 a. If...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT