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

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

R_A = 2.2% + 0.80R_M + e_A

R_B = -2.2% + 1.20R_M + e_B

s_M = 24%; R-square_A = 0.16; R-square_B = 0.12

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% + 1.10R_M + e_A

R_B = –1.4% + 1.25R_M + e_B

s_M = 30%; R-square_A = 0.28; R-square_B = 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.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: