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

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

RA = 2.2% + 0.80RM + eA

RB = -2.2% + 1.20RM + eB

sM = 24%; R-squareA = 0.16; R-squareB = 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:

RA = 3.2% + 1.10RM + eA

RB = –1.4% + 1.25RM + eB

sM = 30%; R-squareA = 0.28; R-squareB = 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: 