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Suppose that the index model for stocks *A* and *B* is estimated from excess returns with the following results:

*R _{A}* = 2.2% + 0.80

*R _{B}* = -2.2% + 1.20

*s _{M}* = 24%;

What is the covariance between each stock and the market index? **(****Calculate using numbers in decimal form, not percentages.** **Do not round your intermediate calculations. Round your answers to 3 decimal places.)**

STOCK A:

STOCK B:

2.

Suppose that the index model for stocks A and B is estimated from excess returns with the following results:

*R _{A}* = 3.2% + 1.10

*R _{B}* = –1.4% + 1.25

*s _{M}* = 30%;

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.**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.)**

**STANDARD DEVIATION :**

**b.**What is the beta of portfolio *Q*? **(Do not round intermediate calculations.** **Round your answer to 2 decimal places.)**

**PORTFOLIO BETA:**

**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.)**

**FIRM-SPECIFIC:**

**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.)**

**COVARIANCE:**