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

R_A = 2.8% + 1.00R_M + e_A

R_B = -1.0% + 1.30R_M + e_Bs_M = 18%; R-square_A = 0.27; R-square_B = 0.13

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.

What is the standard deviation of portfolio Q?

What is the "firm-specific" risk of portfolio Q?

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M92606108

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